Bank of England Governor Andrew Bailey has hinted that the central bank could cut interest rates four times in 2025, depending on the continued moderation of inflation. Speaking in a Financial Times interview on December 4, Bailey confirmed that if inflation continues to ease as expected, a series of quarter-point reductions could occur throughout the year. He said that the pace of such cuts would depend on inflation dynamics and even indicated a potential direction toward gradual adjustments.
Bailey said that the inflation had already decreased much faster than the Bank of England had initially forecasted, and thus was a positive sign. “A year ago, we were projecting inflation to be around 1% higher than it actually is today,” he said, which he said was a testament to the success of the central bank’s monetary policy framework.
Currently, the markets foresee three interest rate cuts for the next year, and investors believe that the Bank will maintain its current rates for its December meeting. Four cuts, as suggested, will reduce the base interest rate to around 3.75%. These cuts come after the two reductions in 2024, the first of which the Bank instituted over the summer. The central bank has been quite vocal in being cautious on the rate cuts, and earlier, Bailey had said that monetary policy must remain tight until the risks of inflation are firmly brought under control.
Bailey’s comments came against the backdrop of UK inflation fluctuating. In October, it unexpectedly surged to 2.3%, a jump from 1.7% in September. But ever since then, anxiety about inflationary factors did not seem to relent. The governor’s comment implies a cautious approach as far as the Bank of England is concerned. That will be in keeping with efforts at stimulating the economy while making sure that inflation goes back to target – 2%.
The value of the British pound was little changed by the announcement, trading at $1.2671 at mid-morning, with the yield on UK 10-year government bonds, known as gilts, little changed around 4.273%. Central banks decisions in the future are likely to depend significantly on the further developments of inflation and market participants will monitor the economy for any signs that may indicate a shift.
