On Thursday (February 6th), the Bank of England (BoE) announced a 25 basis point reduction in the benchmark interest rate to 4.5%, which met market expectations but still revealed some inconsistent voices. In this resolution, although the majority of committee members support a rate cut, two members, Catherine Mann and Swati Dhingra, advocate for a larger rate cut and support lowering the interest rate to 4.25%. The market is sensitive to this adjustment, especially as the pound experienced significant fluctuations in the short term thereafter.

Bank of England's interest rate cut decision and background

The decision to cut interest rates this time comes at a time when the UK economy is facing many challenges, including rising inflationary pressures, weak economic growth, and the complexity of the global economic situation. Although inflation has rebounded, the Bank of England believes that this upward trend is temporary and therefore has chosen a relatively mild interest rate cut strategy. Governor Andrew Bailey mentioned in a statement that the central bank will continue to adopt a "gradual and cautious" approach to future monetary policy adjustments, demonstrating a high level of vigilance towards the current economic situation.

The background of the Bank of England's interest rate cut this time is the weak growth of the UK economy and concerns about future inflation. According to the latest forecast from the central bank, the UK GDP growth in the first quarter of 2025 is expected to be only 0.1%, while a negative growth of 0.1% is expected in the fourth quarter of 2024. This indicates that the economy is still in a sluggish state and the growth prospects are quite bleak. In addition, the Bank of England has also raised its short-term inflation expectations, expecting inflation to peak at 3.7% in the third quarter of 2025, far higher than the previous 2.8%. However, the central bank also emphasized that this upward pressure on inflation is mainly driven by rising energy prices and public service fees, and it is expected that this pressure will be temporary.

GBP market reaction

After announcing the interest rate cut, the GBP/USD immediately experienced severe fluctuations, plummeting nearly 70 points in the short term and hitting a low of 1.2359. Although there was a slight rebound in the end, the intraday decline of the pound reached 0.90%, at 1.2390. The pound also showed similar fluctuations against the yen, with a decline of 0.95% to 188.95. The market's response reflects investors' cautious attitude towards the central bank's moderate interest rate cuts and their expectation that monetary policy may further loosen in the future.

Although this interest rate cut is in line with the market's general expectations, two committee members voted in favor of a larger rate cut (50 basis points), indicating that the internal stance on monetary policy is not entirely consistent. Mann and Dingla's opinions, especially their support for more aggressive interest rate cuts, may reflect concerns about the weak economic growth and persistent inflationary pressures in the UK. The fluctuation of the pound also reflects the divergent attitude of the market towards the policies of the Bank of England, especially in terms of whether the central bank will adopt greater interest rate cuts in the future to stimulate economic growth.

Central Bank Policy Prospects and Market Expectations

According to the latest forecast from the Bank of England, inflation is expected to remain above target levels in the coming years, and the target of returning to 2% will not be achieved until the fourth quarter of 2027. In the short term, the Bank of England expects GDP growth to remain low, with a projected increase of only 0.75% by 2025, a significant decrease from previous forecasts. In addition, the unemployment rate is expected to gradually rise in the coming years, reflecting the weakness of the labor market.

In this context, the market generally expects the Bank of England to continue to adopt a cautious interest rate cut strategy. According to the pricing in the futures market, the UK benchmark interest rate may further decrease to around 4.25% by the end of 2025, lower than previously expected. In addition, internal disagreements over monetary policy in the UK may mean that the central bank will continue to face significant decision-making challenges in the coming months. The different assessments of inflation pressure, economic growth, and the job market by some members of the Monetary Policy Committee will continue to affect the magnitude and pace of future interest rate adjustments.

For the pound, market attention will continue to focus on the overall performance of the UK economy and the policy direction of the Bank of England. Although the pound may face further pressure from expectations of interest rate cuts in the short term, in the long run, the Bank of England's "gradual and cautious" policy may provide some support for the pound. Especially in the context of the complex and ever-changing global economic situation, investors will closely monitor the performance of UK economic data in the coming months, especially whether inflation and employment data meet the expectations of the Bank of England.

Future prospects

From a short-term perspective, the pound may continue to be affected by fluctuations in expectations of interest rate cuts, especially in the coming months as market expectations for further easing by the Bank of England may continue to exert pressure. Given the current inconsistent market expectations for monetary policy adjustments, the volatility of the pound may continue to increase.

In the long run, the trend of the pound will depend on the degree of economic recovery in the UK and how the Bank of England chooses between balancing inflation and economic growth. Despite the Bank of England's interest rates remaining at a relatively high level, further rate cuts are still possible against the backdrop of slowing global economic growth and weak domestic economy. Investors need to pay attention to changes in the UK economic data in the coming months, as well as whether there will be further policy loosening or changes.

Overall, the Bank of England's interest rate cuts reflect the complexity of the current economic weakness and inflationary pressures. The market reaction of the pound also indicates that investors are cautious about the central bank's interest rate cut strategy, especially considering the sluggish growth of the UK economy and the long-term expectation of inflation recovery. In the coming months, the pound may continue to exhibit some volatility, and the market will closely monitor the next steps of the Bank of England's policies and changes in economic data.