Bank of England set to cut rates amid slowing growth

​​​Rate cut widely anticipated but not guaranteed

​The Bank of England's (BoE) Monetary Policy Committee (MPC) meets on Thursday, and markets are pricing in an 85-90% probability of a 25 basis point cut. That would bring the base rate down to 3.75%, marking another step in the easing cycle that began earlier this year.

​The expectation feels relatively solid, but nothing is certain with central banks. Recent inflation data has cooled sufficiently to give the committee room to ease, while rising unemployment and weak growth provide additional justification. Still, the BoE has shown itself willing to surprise markets when conditions warrant.

​Governor Andrew Bailey's recent comments have leaned dovish, which reinforces the case for a cut. However, the committee remains data-dependent, and any unexpected uptick in inflation or wage growth could shift the calculus quickly. Markets have been wrong before.

​Close vote expected within committee

​The decision is likely to be narrowly contested within the MPC, with Governor Bailey potentially casting the deciding vote. This matters more than it might appear, as close votes signal disagreement about the economic outlook and appropriate policy response.

​A tight split would suggest some members remain concerned about inflation risks, even as others focus on growth weakness. That internal tension often translates into cautious forward guidance, which can frustrate markets hoping for clear signals about future cuts.

​Previous meetings have seen splits on both sides of the debate. Hawks worry that cutting too quickly could allow inflation to reignite, while doves argue the economy needs support now. Both sides have valid points, which is why these votes often come down to the wire.

​The composition of the vote matters for future meetings too. If several members oppose easing now, that reduces the likelihood of back-to-back cuts. Markets will scrutinise the vote breakdown for clues about the pace of future easing.

​Economic data strengthens the case for easing

​Recent economic releases have tilted decisively towards supporting a rate cut. Inflation has slowed more than expected, with the latest reading coming in below the BoE's target. That removes one of the primary obstacles to easing policy further.

​Unemployment has crept higher, reaching levels that typically prompt central bank action. The labour market had proven remarkably resilient through the initial tightening cycle, but cracks are now appearing. Redundancies have increased and job vacancies have fallen sharply.

​Gross domestic product (GDP) growth has disappointed, with the economy barely expanding in recent quarters. Business surveys point to continued weakness, and consumer confidence remains subdued. The combination of slack labour markets and weak growth creates a clear case for lower interest rates.

​However, wage growth remains elevated compared to pre-pandemic norms. This is the one data point that gives pause to more aggressive easing. Services inflation also continues to run hotter than headline figures, suggesting underlying price pressures haven't fully dissipated.

​Market pricing reflects high conviction

​Swaps markets currently price in an 85-90% probability of a 0.25% cut this week, which represents strong conviction. That level of certainty means any surprise hold would likely trigger a sharp market reaction, particularly in sterling and gilt markets.

​Options pricing tells a similar story, with relatively low implied volatility ahead of the decision. Traders appear comfortable with the expected outcome, which can create vulnerability if the BoE surprises. The risk-reward of positioning for a cut looks asymmetric at this point.

​Beyond Thursday's decision, markets are pricing in further cuts through 2025, though the pace remains uncertain. Roughly two to three cuts are currently priced for next year, bringing rates down towards 3%. That pricing could shift quickly depending on Thursday's guidance.

​Guidance matters more than the cut itself

​Markets already expect Thursday's cut, which means the real action will come from the BoE's commentary on future policy. Traders will scrutinise every word of the statement and press conference for clues about the pace of easing in 2025.

​The key question is whether the BoE signals further cuts ahead or strikes a more cautious tone. Language around being "data dependent" typically means slower, more measured easing. Any hint of a pause after this cut would disappoint markets expecting a steady downward path.

​Inflation forecasts will receive close attention too. If the BoE upgrades its near-term inflation outlook, that would undermine the case for aggressive easing. Conversely, downward revisions would support expectations for multiple cuts next year.

​The quarterly Monetary Policy Report will include updated economic projections. These provide crucial insight into how policymakers view the balance of risks. Weak growth forecasts combined with benign inflation projections would cement the case for further easing.

​Global central bank divergence creates complexity

​The BoE's expected move occurs against a backdrop of diverging global central bank policies. The European Central Bank (ECB) looks set to hold rates steady for now, while the Bank of Japan (BoJ) may be preparing to hike. That divergence creates cross-currents for currency markets.

​Sterling's performance will depend partly on how the BoE's path compares to other major central banks. If the Federal Reserve (Fed) also continues cutting, sterling may hold up reasonably well. But if the Fed pauses while the BoE cuts, pressure on the pound could intensify.

​What to watch on Thursday

​The rate decision arrives at noon, followed by the Monetary Policy Report and Governor Bailey's press conference. The vote split will be announced immediately, offering the first clue about internal committee dynamics and future policy direction.

​Bailey's press conference typically begins 90 minutes after the decision. His opening remarks often contain the most important guidance, so traders should pay close attention to his assessment of the economic outlook. Any deviation from recent messaging could trigger sharp moves.

​Pay particular attention to questions about the pace of future cuts and the terminal rate. Bailey has been careful not to commit to a predetermined path, but markets will push for clarity. Any specific guidance about 2025 could shift rate expectations meaningfully.