Markets expect the Bank of England’s Monetary Policy Committee (MPC) to hold rates at 4.5% next Thursday, March 20.
Expectations throughout the rest of 2025 have changed considerably, however.
There is a 95% chance of a rate hold this month, interest rate swaps data shows, with a 77% chance of a cut at the MPC’s meeting in May, and a 55.6% chance of a cut in August. This is a marked contrast from January, when traders anticipated only one cut this year—in February.
No further cuts are currently anticipated as far out as February 2026, when the MPC’s first meeting of the new year will take place.
These projections are potentially at odds with the recent upwards inflationary trend seen in the UK’s inflation data. Last month, UK Consumer Price Inflation (CPI) jumped to 3.0%, an uptick from 2.5% in December.
“On the face of it seems a strange change of tack, especially given that inflation increased in January and now sits at 3%,” observes Michael Field, chief market strategist EMEA at Morningstar.
“If anything, expectations of cuts should be moving in the opposite direction.
“That said, there are likely two drivers behind this move. Firstly, growth expectations for 2025 were recently halved by the BoE to just 0.75%. This means the risk of overheating is very low and, if anything, lower rates are required to stimulate the economy.
“Secondly, the European Central Bank is currently working off 2.5% rates and is likely to cut a couple of more times this year. This makes the current BoE rate of 4.5% look incongruous—especially when the economic environments are quite similar.”
What is The Bank of England’s Base Rate?
As of the UK’s base rate sits at 4.5%.
This follows three rate cuts in August and November last year, and on Feb. 6 this year. At its last gathering in February, when it cut rates, the MPC said it had voted seven-to-two in favor of the decision. Next week, investors will be watching those numbers once again to see whether consensus on the committee is changing.
The UK’s latest inflation data for the 12 months to January 2025 showed Consumer Price Inflation running at 3%. This is 0.5% higher than December’s data, and 1% higher than the Bank of England’s own target 2%.
Persistent inflationary activity has already led to fears the Bank may keep rates higher for longer, putting pressure on those with significant debt and mortgage holders switching onto more expensive packages after their fixed-rate deals end. The UK mortgage market remains competetive, however, so borrowers of all kinds should survey the mortgage deals on offer and get professional advice to navigate changing interest rates.
Will The Bank of England Continue to Cut Rates in 2025?
Significant uncertainty continues to surround monetary policy in the UK, Europe, and across the western hemisphere. For one, investors still aren’t quite sure what the impact of US government tariffs will be on the global economy. The geopolitical situation changes daily.
On UK gross domestic product, or GDP, plenty of economists are still concerned about the UK’s lack of progress. The UK base rate is still relatively high. Fears that high rates are stifling growth by limiting spending in the real economy are potentially justified.
Investors will have to wait until next Tuesday, Mar. 18, to find out the UK’s latest CPI figures for January 2025. For now, we know that the UK economy grew 0.1% in Q4 2024 after a no-growth Q3 2024. Year-on-year growth for Q4 2024 was 1.4% compared to Q3 2023.
On the Continent, the balance of power over the future of Ukraine has shifted dramatically in just a few weeks. In the US, equity markets are reacting negatively to the uncertainty this causes for company order books, balance sheets, and investor earnings. Several large investment banks—including Goldman Sachs—have revised upwards their view on the likelihood of a US economic recession.
Meanwhile, commitments to increase defense spending in the UK and Europe have sent bond yields rising. This was recently in visible in Germany, where the abandonment of the country’s long-held debt brake lifted defense stocks like Rheinmetall RHM accompanied a new era of government spending. Bund yields spiked.
Back in the UK, a pledge to reduce the government’s international aid budget in favor of more spending by the Ministry of Defence has achieved certain political aims. But the longer-term effects—alongside other government policies announced at last year’s October Budget—may well be inflationary too. If the data shows persistent inflation in the UK economy, the Bank of England will likely continue to hold rates.
What Will Equities & Bonds Do if The Bank of England Holds Rates?
Equity markets typically react positively to rate cuts, so the response to a rate hold by the Bank of England next week would in principle be negative. That said, markets appear to have priced in a rate hold already, so the reaction could be muted.
However, there are plenty of other things going on, and plenty of other reasons UK equity markets could perform negatively or positively next week. Equities are currently exceptionally sensitive to geopolitical developments, so significant developments could have a pronounced effect on investor sentiment.
This has been most visible in the US, where bullish sentiment over the return of Donald Trump as president in November and December 2024 has given way to serious anxiety. On Monday this week, Tesla TSLA stock closed 15% lower on fears that chief executive Elon Musk’s political activities could lead to a smaller order book this year.
Bond investors are exposed to the uncertainty of geopolitics too. Expectations over government and corporate spending are changing across the world. Bond prices and bond yields are inversely correlated, so the situation has sent prices down and yields upwards.
This is where the duration of investor bond holdings really matters. Because bonds are sensitive to interest rate changes, longer-duration bonds are particularly affected by periods of changing monetary policy. And as longer-term projections change, so too do prices (and the yield) of longer-term securities.
As my colleague Valerio Baselli has explained, bond managers are reacting to this in different ways. Some are selling their longer-dated holdings. Others are buying to take advantage of attractive prices and higher yields by buying the dip.
When Is The Bank of England’s Next Meeting?
The Bank of England has a calendar of meetings and monetary policy publications, as the table below shows.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.
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