Will the Bank of England keep cutting rates in 2025?

Capital Economics analysts anticipate a gradual, rather than aggressive, Bank of England interest rate cutting cycle in 2025, even after an expected initial cut this summer. This cautious approach is driven by persistent core inflation and wage growth, ongoing fiscal uncertainty impacting gilt markets, and the need to balance supporting sluggish economic recovery against reigniting price pressures. The firm forecasts the Bank Rate to end 2025 below 4% from the current 4.75%, contingent on clear evidence of inflation control, indicating investors should not expect a swift return to lower rates.

Analysis

According to analysts at Capital Economics, the Bank of England is poised for a gradual and cautious interest rate cutting cycle through 2025, despite an anticipated initial move this summer. This outlook is predicated on a complex economic backdrop where softening activity and a cooling labor market are counteracted by persistently high core inflation and wage growth, particularly within the services sector. The central bank's path is further complicated by fiscal uncertainty, as potential policy shifts from a new government could influence gilt markets, the pound, and long-term yields, thereby impacting monetary policy expectations. While Capital Economics forecasts the Bank Rate will fall from its current 4.75% to below 4% by the end of 2025, this trajectory is contingent on definitive evidence of inflation being under control, reinforcing the view that a swift return to a low-rate environment is improbable.

Key Decisions for Investors

• Investors should recalibrate expectations for a swift monetary easing cycle, as the Bank of England's cautious stance implies UK interest rates will remain elevated for longer than previously hoped.
• Monitor UK gilt yields and the sterling exchange rate closely, as fiscal policy decisions from the new government pose a significant risk that could trigger market volatility and alter the Bank's rate path.
• Consider positioning portfolios for a prolonged period of sluggish UK growth and persistent inflation, which may favor companies with strong pricing power and balance sheets over rate-sensitive growth assets.