Bank of England to resume rate cuts with outlook complicated by tax hikes and Trump tariffs

The Bank of England is widely expected to cut interest rates on Thursday, amid a complex backdrop of a tepid domestic growth outlook, an upcoming hike in taxes paid by businesses and U.S. President Donald Trump’s market-rattling tariff threats.

As of Wednesday morning, Money markets were pricing in a 98% probability of a quarter-point rate cut at the February meeting, which would take the Bank rate to 4.5%. The BOE opted to hold at its previous gathering in December, citing “elevated” services inflation of 5% and a higher-than-expected headline print of 2.6% in November. That rate has since cooled to 2.5%, while services inflation dropped to a 33-month low of 4.4%.

Since January, traders have ramped up their bets on the total number of BOE rate cuts likely to take place during 2025. Where at the start of the year only two trims were expected, economists and prominent business voices including the head of British bank Lloyds, Charlie Nunn, have said they anticipate three trims. Markets are meanwhile pricing more than 80 basis points’ worth of cuts by December, suggesting four reductions could be a possibility.

Those bets have built on the back of several data surprises, including weaker-than-expected retail sales data and disappointing November growth.

Closely watched on Thursday will be the vote split among the nine members of the Monetary Policy Committee — with a unanimous or near-unanimous decision suggesting a bias toward easing — as well as the BOE’s updated growth and inflation projections.

The U.K. economy stagnated in the third quarter, and the BOE has already forecast that the final three months of last year also showed no growth.

Any downgrade to the BOE’s 2025 growth projections, or to its outlook for inflation to hit 2.7% in the fourth quarter of 2025 and ease to 2.2% across 2026, will be seen as support for the doves.