Bank of England Wants You to Expect Four Rate Cuts Next Year

Image source: Bank of England. Credit Laura Bell.

The underlying messaging is clear: the market is underestimating how many cuts the Bank of England will deliver next year.

Heading into the Bank's decision to keep Bank Rate unchanged at 4.75%, the market expectation signalled by Overnight Index Swaps was for a little more than two more interest rate cuts in 2025.

This would imply an impending slowdown in what has been a comfortable cut-per-quarter pace for the Bank so far.

On December 5, Governor Andrew Bailey even said that he thought it appropriate to make four 25 basis-point cuts in 2025.

Bailey, therefore, might have condoned the decision by three members of the nine-strong Monetary Policy Committee (MPC) to break rank and vote for a cut.

"We interpret this larger vote split as a signal to the market that the MPC is advocating a more rapid pace of cuts than currently priced in," says Stefan Koopman, Senior Macro Strategist at Rabobank.

Dhingra, Ramsden and newcomer Taylor broke rank to vote for an immediate rate cut.

"Ramsden’s dissent is noteworthy: having pushed for the first cut already at the May meeting, his shift signals that the MPC advocates quicker rate cuts than the market currently prices," explains Koopman.

Rabobank says the path of least resistance remains for quarterly cuts. With three members already favouring cuts, only two more need to switch sides in February to mark the next move. The bank expects the first cut of 2025 to land then.

Bank economists downgraded growth expectations and now expect zero GDP growth in 2024 Q4, which is weaker than the 0.3% incorporated into the November Report.

Fears of a deteriorating economic outlook, as well as survey evidence that the labour market is experiencing job losses, will drive any decision to accelerate the pace at which the Bank delivers cuts.

"In our view, the path of least resistance remains a deeper rate-cutting cycle than currently pencilled in by policymakers and market participants alike," says Konstantinos Venetis, an analyst at TS Lombard.

Sanjay Raja, UK Economist at Deutsche Bank thinks there will be four interest rate cuts in 2025, but the quarterly pace of cuts, as currently favoured, won't be adhered to.

"We continue to see four rate cuts next year but we now expect a more backloaded cycle in 2025," explains Raja. "We expect the MPC to deliver three quarter point rate cuts in the second half of next year."

A slow start to 2025 would chime with the statement from the MPC that "recent developments added to the argument for a gradual approach to the withdrawal of policy restrictiveness while eschewing any commitment to changing policy at a specific meeting".

By the second half of the year the Bank would feel more comfortable in accelerating as Deutsche Bank expects unemployment to push past 4/5%, wage settlements drop to target-consistent levels, and services inflation resumes a firmer downtrend.