UK INTEREST RATE DECISION: BANK OF ENGLAND IS EXPECTED TO CUT RATE BY 25BPS

Topics:

• A glance on Footsie 100
• overview of UK inflation
• potential effects of Rate cut by BoE MPC 

British Stocks Recovers After Three-Day Slump
 

After three consecutive losses, British stocks recovered on Thursday. The FTSE 100 gained traction late Wednesday, closing bullish and recovering earlier setbacks. However, a stronger pound continued to weigh on the export-heavy index, while investors treaded cautiously ahead of the Bank of England's interest rate decision. As of 12:54pm GMT +4 (Dubai time), the FTSE 100 inched up to 8711.01, signaling cautious optimism with 0.65% gain.
On the economic front, the Bank of England is expected to cut rate by 25bp, marking the third cut since August 2024. This move could mark a more aggressive effort to reignite growth in a stagnant UK economy. Markets have already priced in this cut, anticipating a pivotal shift in monetary policy.

UK Inflation on the Rise: Interest Rate Cuts Loom as the Bank of England Acts

Currently, inflation in the UK holds steady at 2.5%, but warning signs suggest it may climb further. Rising labor costs and heightened consumer price expectations are key contributors to this upward pressure. In a bid to counter this inflation and breathe life into the economy, the Bank of England is expected to lower interest rates by 0.25 percentage points to 4.5% today February 6th, 2025, at 4pm GMT +4 Dubai time.
            The Bank's November 2024 Monetary Policy Report projected inflation peaking around 2.75% by mid-2025, gradually easing to 2.2% by late 2026 and leveling at 1.8% by the end of 2027.
Attention now tilts towards the upcoming Consumer Price Inflation report for January 2025, set to be released on Wednesday February 19th. This critical report is expected to offer fresh insights into UK inflation outlook and shape future monetary policy decisions.

Energizing the UK Economy: The Ripple Effect of UK Interest Rate Cuts

Slashing interest rates can be a shot of adrenaline for the UK economy. With borrowing costs reduced, both individuals and businesses are incentivized to spend and invest, potentially breaking free from the current stagnation. However, the move isn’t without its challenges. Inflation, currently at 2.5%, is projected to rise to 2.75% by mid-2025 before easing in the following years. The Bank of England faces a delicate balancing act of stimulating growth while keeping inflation in check.
The decision may also shake up the currency market. Conventionally, lower interest rates often weaken a nation’s currency, and a softer pound could give UK exports a competitive edge globally. On the flip side, it would drive up import costs, straining consumers and businesses dependent on foreign goods.

Financial markets are expected to feel the shift as well. While equities may gain traction due to cheaper borrowing, bond yields could dip as investors adjust to the evolving interest rate landscape.
In essence, the Bank of England’s rate cut is a high stakes maneuver aimed at revitalizing the economy while navigating inflationary pressures and market dynamics.