Jamie Spencer
Investor confidence in significant rate cuts from the Bank of England (BOE) next year has diminished, with sticky inflation and robust wage growth fueling doubts about aggressive monetary easing. Money markets now price in just 49 basis points of cuts through the end of 2025, down from over 70 basis points earlier this week.
The shift began after UK employment data on Tuesday revealed higher-than-expected wage growth, reigniting concerns about persistent inflationary pressures. The repricing suggests investors are increasingly skeptical about the likelihood of a third rate cut from the BOE next year.
Sticky Inflation Complicates BOE Policy
While Wednesday’s consumer price index (CPI) data aligned with economists’ expectations, it did little to alleviate concerns. Services inflation, a key metric closely monitored by BOE policymakers, remains elevated at 5%, signaling that inflationary pressures are far from easing.
The BOE has already implemented two quarter-point cuts this year, bringing its key interest rate to 4.75%. However, it has been slower to ease monetary policy compared to peers like the Federal Reserve and the European Central Bank. Analysts expect this cautious approach to persist in 2025, given the challenging inflation backdrop.
Market Adjusts to Fewer Rate Cuts
Money markets have responded to the sticky inflation data by scaling back their expectations for BOE rate reductions. The reduced pricing reflects concerns that lingering wage growth and high services inflation could limit the BOE’s room to maneuver on monetary easing.
With the BOE expected to hold rates steady at its meeting on Thursday, the focus will shift to forward guidance from policymakers. Markets will closely watch for signals on how the BOE plans to balance inflation risks against economic growth in the coming year.
A Divergent Path from Global Peers
The BOE’s cautious approach contrasts with the Federal Reserve and the European Central Bank, which have eased monetary policy more aggressively. This divergence highlights the unique challenges facing the UK economy, including stubbornly high services inflation and a tight labor market that continues to push wages higher.
As the BOE navigates these complexities, its gradual approach to rate cuts underscores the difficulty of achieving its inflation target without risking economic instability.
Looking Ahead
The BOE’s rate decision on Thursday and subsequent commentary will provide further clarity on its policy trajectory. However, with inflationary pressures remaining entrenched and wage growth defying expectations, the scope for significant monetary easing appears increasingly constrained.
For now, investors are adjusting to the reality of a less dovish BOE, with fewer rate cuts likely on the horizon as the central bank grapples with balancing inflation control and economic growth.
