British Pound Slumps After BoE Rate Cut, but Recovery Likely
The British Pound weakened after the Bank of England (BoE) cut interest rates and downgraded the UK’s economic growth outlook. However, a rebound is expected in the coming days.
Markets interpreted the decision as dovish, reinforcing expectations of further rate cuts. Yet, the BoE also raised its inflation forecasts and stated that a "gradual and careful approach" to easing policy remains appropriate. This limits the scope for an aggressive rate-cutting cycle beyond the anticipated three cuts in 2025, making the initial Pound selloff appear overdone.
Much of the day's GBP weakness occurred before the announcement, likely due to tactical market positioning. However, further declines followed reports that two members of the nine-person Monetary Policy Committee (MPC) voted for a larger 50 basis point cut, signalling a push for a faster easing cycle.
A key surprise was Catherine Mann, a previously hawkish MPC member, switching her stance. Meeting minutes reveal she sought to send a "clear signal" on rates while acknowledging the need to keep policy restrictive. Her shift was likely driven by a sharp downgrade to UK growth forecasts, with GDP expected to rise just 0.4% year-on-year by Q1 2025, down from 1.4% projected in November 2024. The unemployment rate is also set to rise slightly to 4.75%.
However, rising inflation complicates the case for aggressive cuts. The latest Monetary Policy Report revised CPI inflation projections higher, with a peak of 3.7% in Q3 2025—up from the 2.8% previously forecast. Given the BoE's mandate to return inflation to 2.0%, this raises questions about the logic behind calls for faster rate cuts.
The UK economy now faces an increasingly stagflationary backdrop, where weak growth coincides with rising inflation. While the Pound should recover from its initial drop, a dominant stagflation narrative in the coming weeks could pose further downside risks.
