Bank of England Keeps Rates Steady Amid Economic Stagnation

• Bank of England keeps rates at 4.50% as the UK faces inflation and economic challenges.
• BoE predicts gradual rate cuts starting in May, with a terminal rate of 3.5% by 2026.
• The CPI inflation rose to 3% in January from 2.5% due to energy prices and essential goods.

Despite economic challenges, the Bank of England (BoE) is anticipated to maintain its key interest rate constant at 4.50%. This decision also resembles the actions of the US Federal Reserve, which also decided to be cautious with interest rate shifts. Though the BoE aims to ease the inflation rate, it may have to make more rate cuts later in the year.

Economic Outlook and Inflationary Pressures

Despite the BoE’s decision to hold rates, the UK’s inflation remains above its target. The Consumer Prices Index (CPI) inflation rose to 3%  in January from 2.5%  in December due to energy prices and essential goods. Additionally, the core Consumer Price Index, which excludes volatile items such as food and energy, increased to 3.7% over the past year. These figures suggest that inflationary pressures are still prevalent, making it difficult for the BoE to take aggressive steps toward reducing rates.

The UK economy has shown signs of stagnation. After a minimal growth of just 0.1% in the fourth quarter of 2024, the UK narrowly avoided a recession. The economic performance shrunk by 0.1% in January while facing broader challenges. The UK’s economic performance remains influenced by worldwide economic instability including the Russia-Ukraine military crisis and U.S. tariffs. Slow economic growth and global uncertainties have prompted the BoE to choose a steady and cautious rate-cut strategy.

Related: No Rate Cut, Low Monthly Cap on Treasuries From April: Fed

Monetary Policy Strategy and Forward Guidance

The BoE’s Monetary Policy Committee (MPC) has been under considerable pressure to balance inflation and support economic growth. Notably, Governor Andrew Bailey said that the committee needs to be cautious because inflation management has not yet been achieved. The MPC’s strategy includes avoiding rapid rate cuts that could derail the disinflation process.

Market analysts predict that while the BoE will keep rates unchanged this week, it may implement further cuts later in the year. Economists at Nomura Securities forecast that rate cuts will begin in May and continue through 2026. They believe that the terminal rate should be 3.5%. Due to global conditions, future BoE meetings will also be scrutinized for changes in its policy or forward guidance.

The majority of households and businesses rely on the BoE’s decisions as interest rates directly influence borrowing costs, including mortgages and loans. Analysts predict additional rate cuts may occur by 2025, yet the Bank of England will base its decisions on how inflation and economic factors develop.

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