By David Milliken and Andy Bruce
LONDON, Feb 6 (Reuters) – The Bank of England lowered interest rates by a quarter of a percentage point on Thursday, judging a sharp upward revision to its inflation forecasts for this year will prove temporary, while two officials called for a bigger rate cut against a backdrop of weaker growth.
The cut to 4.5% was in line with economists’ expectations in a Reuters poll, but the two dissenting votes from external members Catherine Mann and Swati Dhingra in favour of a bigger rate cut to 4.25% were not.
Mann until now had generally opposed rate cuts, though she had previously said that a switch to more active policy loosening would be needed at some point.
Bank of England Governor Andrew Bailey said the BoE would be “monitoring the UK economy and global developments very closely and taking a gradual and careful approach to reducing rates further” – a shift from December’s language where he spoke only of a “gradual” approach.
Hit by worries about finance minister Rachel Reeves’ tax increases for employers, the risk of a global trade war led by U.S. President Donald Trump and rising costs, the British economy has barely grown since mid-2024. The BoE warned that it likely contracted by 0.1% in the fourth quarter.
Thursday’s rate cut is only the third since the BoE started lowering borrowing costs from a 14-year high in August and leaves British rates among the highest for advanced economies and just above the U.S. Federal Reserve’s range of 4.25-4.5%.
Last month, economists polled by Reuters had forecast the BoE would make four quarter-point rate cuts this year, lowering its main interest rate to 3.75%, while more recently markets saw cuts to 4% as more likely.
Minutes of February’s decision showed some policymakers wanted a “cautious” approach to future rate cuts because of weak productivity that could push up inflation, while others saw less of a risk of persistent above-target inflation but said the BoE still needed to be “careful”.
The outlook for Britain’s economy is worse than when the BoE published its last full set of forecasts in November.
Inflation – already above target at 2.5% – is expected to peak at around 3.7% in the third quarter of this year due to higher energy prices and expected increases in regulated water bills and bus fares, up from a previous forecast peak of 2.8%.
The BoE does not expect inflation to fall back to its 2% target until the final quarter of 2027, six months later than it had forecast before.
The central bank also halved its forecast for growth this year to 0.75% – reflecting weak business and consumer sentiment and more sluggish productivity growth – although forecasts for annual growth in 2026 and 2027 were revised fractionally higher to 1.5% from 1.25%.
The BoE said it was unclear exactly how any future U.S. tariffs would affect inflation in Britain, but said higher global tariffs were likely to cause slower growth, even if Britain was not specifically targeted.
These forecasts were based on market expectations for a slower pace of rate cuts than in November, with interest rates dropping to around 4.25% by the end of this year versus about 3.75% expected before.
The two policymakers who voted for an immediate cut in rates to 4.25% had different reasoning. The minutes did not say which view was linked to Mann or Dhingra, although one of the policymakers was described as supporting an “activist” approach, the language previously used by Mann.
For the “activist” policymaker, voting for a bigger rate cut would give a clearer signal to markets, although she expected monetary policy would still need to stay restrictive for some time.
For the other policymaker, weak growth was likely to ensure that inflation would return to target in the medium term.
(Reporting by David Milliken and Andy Bruce)
(Reporting by David Milliken, Andy Bruce and Suban Abdulla)
Keywords: BRITAIN BOE/
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