Bank of England to cut rates, but investors demand roadmap for 2025 – London Business News

The Bank of England is expected to cut interest rates again this week, marking its second cut since August.

With rates likely to fall by a quarter of a point to 4.75%, investors are already turning their attention to what 2025 might hold for monetary policy.

After inflation hit its lowest level in two years and wage growth cooled, markets were hoping for a quick cycle of rate cuts. However, expectations were tempered after the government’s autumn budget, which is expected to increase inflation next year.

What investors, both domestic and global, want most from the Bank of England in 2025 is a firm hand and clarity.

They seek the right balance between supporting economic growth and managing inflation.

The recent Budget, with its £70 billion increase in annual spending, introduced uncertainty into the inflation outlook.

If inflation is expected to remain sticky, the BoE could be forced to slow its rate-cutting cycle, something investors are now pricing in. Initial expectations of cuts of nearly five-quarters of a point next year have been scaled back, with many now predicting less. aggressive action by the central bank.

For global investors, the stability of UK monetary policy is crucial. With the UK economy already going through a turbulent few years, from Brexit to the pandemic and energy price shocks, the need for predictability is greater than ever.

A well-telegraphed rate cut would give companies the confidence to plan their investments, knowing that borrowing costs will gradually fall.

On the other hand, sudden and abrupt policy changes could create unwanted volatility and discourage long-term investment, especially from international players.

Domestically, UK businesses and households are hoping for relief from high borrowing costs, but they also know that inflation remains a threat.

The Bank of England’s cautious approach to cutting interest rates reflects the reality that inflation could rise again, driven by higher business costs and rising energy prices. While investors would welcome a series of steady rate cuts in 2025, they are keenly aware that the BoE cannot ignore inflationary pressures, especially if the sharp increase in government spending pushes prices up faster than anticipated.

The main concern among investors is that the BoE’s hands could be tied on inflationary pressures, forcing a slower pace of rate cuts than many had hoped.

If inflation rises beyond the Office for Budget Responsibility (OBR) forecast of 2.5% to 2.6%, the BoE will need to remain cautious. That could limit the number of rate cuts next year, disappointing those hoping for more aggressive monetary easing.

However, what investors don’t want is for the Bank of England to move too hard in either direction. A dramatic shift toward rate cuts could fuel inflation, while an overly conservative approach could stifle economic growth.

What is needed is a gradual, well-signaled rate cut that aligns with the bigger economic picture – supporting growth without letting inflation get out of hand.

As 2025 approaches, communication from the BoE will be essential. Investors will be looking for clear signals on the path of rates, with the BoE having to strike a delicate balance between addressing inflation risks and providing much-needed economic stimulus.

Global markets in particular are watching closely as uncertainty surrounding UK monetary policy could affect the country’s attractiveness as an investment destination.

If the central bank can communicate its intentions effectively and maintain a measured pace of interest rate cuts, it will help restore confidence and encourage investment.

The alternative – uncertainty and mixed signals – could prolong the economic challenges the UK has faced in recent years. For now, all eyes are on this week’s decision and what it signals about the way forward.