By David Milliken and Andy Bruce
LONDON (Reuters) -The Bank of England cut interest rates by a quarter-point and some policymakers wanted a bigger move to offset a slowdown, but the BoE said it would be careful about further moves in the face of an expected inflation spike and global economic uncertainty.
The BoE halved its 2025 growth outlook – a blow for finance minister Rachel Reeves who is seeking to speed up the economy – while a jump in inflation to almost double the central bank’s 2% target this year would probably be temporary.
Thursday’s rate cut to 4.5% was in line with expectations in a Reuters poll of economists.
But investors were surprised by the dissenting votes on the Monetary Policy Committee from external members Catherine Mann – who was previously the MPC member most opposed to rate cuts – and Swati Dhingra, who sought a bigger reduction to 4.25%.
Sterling fell against the dollar to trade 1% lower on the day. Two-year British government bond yields touched their lowest level since before Reeves’ budget in October.
Investors were pricing in between two and three further rate cuts by the end of 2025.
BoE Governor Andrew Bailey said the general direction for inflation remained downwards and he expected to be able to cut rates further.
“But we will have to judge meeting by meeting, how far and how fast,” Bailey said.
Analysts focused on the downbeat growth outlook which the BoE said had weakened since its last forecasts, published a few days after Reeves’ budget announcement.
“The fact that two MPC members voted to deliver a bumper 50 basis-point cut, despite revising up near-term inflation forecasts, gives a sense of how concerned some policymakers are about the headwinds to growth,” said Luke Bartholomew, deputy chief economist at fund manager abrdn.
Hit by worries among businesses about the economic policies of the new Labour government, the risk of a global trade war led by U.S. President Donald Trump and rising costs, Britain’s economy has barely grown since mid-2024.
The BoE said it likely contracted by 0.1% in the three months to December.
It said it was unclear exactly how any future U.S. trade tariffs would affect inflation in Britain, but said higher global tariffs were likely to cause slower growth, even if Britain was not specifically targeted.
Bailey said this global uncertainty was a factor behind the decision to add the word “careful” to the bank’s guidance about its future stance on rate cuts, which it continued to also describe as “gradual”.
Thursday’s cut is only the third since the BoE started lowering borrowing costs from a 14-year high in August. It leaves British rates among the highest for advanced economies and at the top of the U.S. Federal Reserve’s range of 4.25-4.5%.
Last month, economists polled by Reuters had forecast the BoE would make four quarter-point cuts this year, lowering its main rate to 3.75%, while more recently markets saw cuts to 4% as more likely.
Minutes of February’s decision showed some policymakers wanted a cautious approach to future cuts because of weak productivity that could push up inflation. Others saw less risk of persistent above-target inflation.
DARKER OUTLOOK
The outlook for Britain’s economy is worse than when the BoE published its last full set of forecasts in November.
Inflation – already above target at 2.5% – is expected to peak at around 3.7% in the third quarter of this year due to higher energy prices and expected increases in regulated water bills and bus fares, up from a previous forecast peak of 2.8%.
The BoE does not expect inflation to fall back to its 2% target until the final quarter of 2027, six months later than it had forecast before.
Bailey repeatedly said the path for weaker inflation remained in place.
The BoE also halved its forecast for economic growth in 2025 to 0.75%, reflecting weak business and consumer sentiment and more sluggish productivity growth.
Forecasts for economic growth in 2026 and 2027 were nudged up to 1.5% from 1.25%.
The forecasts were based on market expectations for a slower pace of rate cuts than in November, with interest rates dropping to around 4.25% this year versus about 3.75% expected before.
The two policymakers who voted for an immediate cut in rates to 4.25% had different reasoning. The minutes did not say which view was linked to Mann or Dhingra, but one policymaker was described as supporting an “activist” approach, the language previously used by Mann.
(Writing by David Milliken; Graphic by Sumanta Sen; Editing by Catherine Evans and Hugh Lawson)
