Bank of England poised to cut rates on 6 February despite inflationary pressures in the bagging area

The Bank of England will make its first interest rate decision of 2025 on Thursday 6 February, and there is a high chance it will cut the cost of borrowing.

Economic signals have been weak and services inflation has fallen back substantially since the last meeting in December, at which point three members of the Bank’s Monetary Policy Committee already voted for a cut to 4.5%. The market is currently pricing in a 90% chance of a rate cut on 6 February and that feels about right. There’s the possibility of a surprise, but a small one.

The latest wage growth reading was a hot one, which will give the Bank some pause for thought before it cuts rates.

A boost to the National Living Wage from April will add further fuel to the fire and will limit the ability of some companies to pass on the rise in National Insurance to employees through their wage packets. This will force businesses to take a hit to profits or push through price rises to customers. The Bank will be especially sensitive to the latter given its potential to revive domestic inflation.

The British Retail Consortium wrote to the Chancellor in November outlining the £5 billion annual cost to the retail sector from rises in National Insurance and the National Living Wage, saying these costs would make ‘job losses inevitable and higher prices a certainty’. Consumers may well be feeling some extra inflationary pressures in the bagging area before too long.

There is a significant divergence of views on how many rate cuts we’re going to get from the Bank of England this year. Morgan Stanley reckons five, Goldman Sachs reckons four, and the market is pricing in two to three.

This perhaps speaks to a volatile economic environment, with a new Labour government laying out a raft of policies designed to boost growth, while UK companies are yet to fully adjust to the policies announced in the Budget.

Clearly the business reaction to a higher National Living Wage and a hike in National Insurance will have a considerable bearing on economic growth, employment and inflation. We can also safely say there’s a fair amount of uncertainty generated by the election of Donald Trump as US President, which potentially has huge ramifications for economies across the globe, including our own. Good luck sticking that through your quantitative economic model.

Since the bond market got a case of the jitters at the beginning of the year, gilt yields have fallen back to levels at which they started 2025. They are still higher than when Rachel Reeves delivered the Budget in October, which could spell trouble for the Chancellor if sustained until the Spring Statement in March.

An interest rate cut at the forthcoming meeting is unlikely to precipitate a major shift in gilt yields seeing as it is largely priced in, but the precise voting split and the accompanying commentary could spark some movement.

That’s especially the case because we will be getting a full brain-dump from the Bank of England in the form of a Monetary Policy Report alongside the interest rate decision. This will lay out the Bank’s economic projections and allow the market to take a firmer view on how many interest rate cuts are in the pipeline.

The report will also deliver the Bank’s latest assessment of UK growth prospects. Its last detailed missive in November was a tick in the box for Rachel Reeves as it upgraded short-term growth estimates, citing the Budget as a contributing factor. The Chancellor will be hoping the Bank doesn’t pour cold water on her current efforts to relaunch her growth agenda with some downbeat economic forecasts.