Key Highlights:

• MPC expected to cut rates by 25 bps to 4.50%
• Growth outlook downgraded; inflation forecast revised higher
• Rate announcement at 12:00 GMT, followed by a press conference at 12:30 GMT

The Bank of England (BoE) is set to deliver its latest monetary policy decision on Thursday, with policymakers widely expected to lower the main lending rate by 25 basis points (bps) to 4.50%. However, investors and economists will be watching just as closely for the updated economic projections from the Monetary Policy Report (MPR), which will outline the central bank’s expectations for growth and inflation.

Despite the anticipated rate cut, uncertainty remains high, particularly with inflationary pressures persisting and economic growth slowing. While markets are pricing in a gradual path of rate reductions, the BoE’s communication on future moves will be just as critical as the decision itself.

Uncertain Backdrop: Inflation Risks vs. Sluggish Growth

The UK economy has shown mixed signals in recent months, complicating the policy outlook. GDP contracted by 0.1% in October, followed by a modest 0.1% expansion in November, underscoring the fragile state of economic activity.

Meanwhile, labour market conditions have softened, with the unemployment rate ticking up from 4.3% to 4.4% at the start of Q4. However, wage growth remains strong, feeding into inflation concerns.

Headline inflation rose to 2.6% in November from 2.3% in October, before slightly easing to 2.5% in December. Notably, services inflation—a key metric watched by the BoE—fell to 4.4% in December after holding at 5.0% for two months.

The combination of slowing growth and sticky inflation presents a dilemma for policymakers. Jack Meaning of Barclays warns that February may be too soon for a decisive dovish pivot, as inflation is expected to pick up in the coming months.

“There is uncertainty on the passthrough of Budget measures along with future fiscal policy,” Meaning noted.

Updated Forecasts: Weaker Growth, Higher Inflation

Economists anticipate the BoE will downgrade its GDP growth forecast, reflecting the tightening financial conditions since the last meeting.

Mark Capleton of BofA pointed out that since November, oil and gas prices have risen 7% and 19%, respectively, while sterling has weakened by 1.5%, all of which could push inflation higher in the near term.

“The impact will be mitigated somewhat by the higher Bank Rate path,” he added.

While growth concerns persist, inflation risks are expected to keep the BoE cautious about signaling aggressive rate cuts.

Guidance: A Cautious Approach to Easing

With a 25 bps cut already priced in, market attention will turn to how the BoE frames its forward guidance. Analysts expect the central bank to stick to a gradual and meeting-by-meeting approach, rather than pre-committing to a deeper easing cycle.

“We don’t expect the BoE’s guidance to shift away from the gradual – interpreted as quarterly – and meeting-by-meeting approach,” Capleton said.

Governor Andrew Bailey is expected to emphasize flexibility during the post-meeting press conference, underscoring the need to remain data-dependent amid ongoing uncertainties.

Benjamin Nabarro of Citi highlighted that headline inflation is set to accelerate over the next six months, even as the labour market continues to weaken.

“We think a growing focus will be on the likely level of – and risks around – the two-year inflation point,” Nabarro said. “This will drive further easing, with a de-emphasis on near-term volatility.”

With global trade disruptions, fiscal policy uncertainty, and inflation dynamics all in play, the BoE’s approach is likely to remain non-committal in the near term. The key takeaway for markets? Rate cuts may be coming, but the path ahead remains highly uncertain.

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Next Steps: What to Watch

✔ 12:00 GMT – Rate decision announcement
✔ 12:30 GMT – Governor Bailey’s press conference
✔ Market reaction to BoE guidance on future rate cuts