The possibility of another Bank of England (BOE) interest rate cut this year is growing slimmer as markets adjust expectations following the central bank’s August meeting. Higher-than-anticipated inflation and ongoing geopolitical uncertainty have contributed to a shift in sentiment, with money markets now assigning a less than 50% chance of any further rate reductions in 2025.
Inflation and Market Dynamics
July’s inflation rate came in at 3.8%, exceeding the consensus expectation of 3.7% but aligning with the BOE’s forecast. Inflation is expected to peak at 4% in September before easing toward 3.6% by the year’s end. However, persistently high inflation in the services sector, driven partly by minimum wage hikes and increased employer tax contributions, remains a concern.
Despite this, energy prices provided some relief in July, tempering the overall upward pressure on inflation.
A Narrow Policy Decision
The BOE’s August monetary policy meeting revealed significant division within the rate-setting committee. The decision to cut rates was narrowly passed with a 5-4 majority, reflecting the central bank’s cautious approach. BOE Governor Andrew Bailey emphasized the risks of persistent inflation, warning against premature easing.
Current Market Forecasts
Markets now predict a 57% likelihood that the BOE will maintain its current 4% Bank Rate through December 2025. Earlier expectations of at least one more rate cut this year have diminished, influenced by the BOE’s messaging and the recent inflation data.
Analysts note that while a November rate cut remains possible, it hinges on inflation trends and labor market conditions. Employment has declined in eight of the past nine months, but recent survey data suggests some stabilization.
Analyst Perspectives
James Smith, developed markets economist at ING, remains cautiously optimistic about a November rate cut, describing it as “more likely than not.” However, he acknowledges the uncertainty stemming from the BOE’s divided committee and volatile inflation factors, such as seasonal airfare costs.
Cathal Kennedy, senior U.K. economist at RBC Capital Markets, also sees a November cut as a possibility, provided inflation aligns with forecasts and the labor market continues to ease.
Conversely, Suren Thiru, economics director at the Institute of Chartered Accountants in England and Wales, dismissed the prospect of a September cut given the current inflation trajectory. Thiru expects inflation to decelerate in the autumn as economic weaknesses weigh on prices.
Impact on Borrowers and the Pound
For U.K. borrowers, the updates signal potential challenges ahead. Homeowners on variable-rate mortgages or nearing the end of fixed-rate deals may face higher borrowing costs. Mortgage rates have stagnated in recent weeks, but experts warn of potential increases following the latest inflation data.
Meanwhile, the British pound is poised to benefit from a higher interest rate environment. While flat against the U.S. dollar and euro on Wednesday, analysts believe sterling will remain strong for the remainder of the year.
Broader Context
The BOE’s cautious stance comes as other central banks signal their policy directions. The European Central Bank is widely seen as having concluded its easing cycle, while uncertainty surrounds the Federal Reserve’s next steps amid a complex U.S. inflation outlook.
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