Asset managers and markets were not surprised by the Bank of England reducing interest rates to 4.5% from 4.75%, putting rates at their lowest point since June 2023.
The decision was made by the Bank of England’s nine person Monetary Policy Committee. At a meeting on Feb. 5, the MPC voted by a majority of 7–2 to reduce rates by 0.25 percentage points. Two members preferred to reduce the rate by 0.5 percentage points, to 4.25%, including American economist Catherine Mann.
“Today’s 25 bps cut, although priced by the market beforehand, was not all in line with expectations as the split of the committee votes was certainly on the dovish side of the ledger,” said Jamie Niven, senior fixed income fund manager at Candriam, which had assets under management of €149 billion as at ($160 billion) of June 30, in a news release.
According to BOE data, U.K. inflation rates are currently at 2.5%, above a targeted inflation rate of 2%.
“The Bank of England surprised no one in cutting rates 25 bps. More noteworthy was the dovish tilt of the MPC, particularly the switch of Mann from one of its most hawkish members to one of its most dovish, in her vote for a 50 bps cut,” said Tim Graf, head of EMEA macro strategy at State Street Global Markets, which has AUM of $4.73 trillion, in a news release.
On Jan 30., the European Central Bank cut interest rates in the Eurozone from 3% to 2.75%, making it five cuts by the ECB since June last year.
“With inflation proving more stubborn than hoped in the U.K., further reductions are likely to be gradual and there’s a chance we’ll end 2025 with rates still significantly higher than we became accustomed to pre-2022,” said Dean Butler, managing director for retail direct at insurance firm Standard Life, part of Phoenix Group, in a news release.
Slow growth and persistent inflation remain issues for the U.K.’s current Labour government. The most recent Budget increased the employee tax burden through the raising of National Insurance contributions, a change since criticized by the opposition Conservatives.
“The BOE is going to have to walk a tightrope in the year ahead. The economy is stagnating, and the announced NI increase has driven growth and inflation in opposite directions: Employment intentions have fallen while expected price growth and services output prices have risen, as employers cut back recruitment or look to pass on the NI increase via prices,” said Chris Arcari, head of capital markets at pensions consultancy Hymans Robertson, in a news release.
