BoE and ECB cut interest rates as economic growth stalls

Bank of England

The BoE’s decision to cut rates came with several cautionary warnings about the economic outlook, citing weaker growth, higher inflation, and increased uncertainty. The BoE now expects the economy to grow just 0.75% in 2025 and estimates a 0.1% contraction in the fourth quarter of 2024, signaling economic stagnation since the Labour government took office last summer.

The Bank also noted that the government's budget-driven increase in employers’ national insurance contributions is likely to push prices slightly higher than initially expected and contribute to job losses, according to its surveys. Forecasts now project unemployment rising to 4.8% over the next year, 0.5 percentage points above its November estimate. Meanwhile, headline inflation is expected to accelerate to 3.7% in the fall, largely due to external factors such as energy costs. The BoE suggested this short-term pickup is unlikely to significantly impact monetary policy decisions.

Governor Andrew Bailey reaffirmed expectations for further rate cuts, stating, “the disinflation process continues.” However, he acknowledged heightened uncertainty linked to recent global trade developments, emphasizing the need for caution in setting policy over the coming months.

European Central Bank

The ECB’s unanimous decision to cut rates brings the deposit rate to its lowest level since early 2023, following new data showing the eurozone economy stagnated in the fourth quarter 2024. President Christine Lagarde warned that economic momentum remains weak, with manufacturing continuing to contract despite modest expansion in services. Lagarde noted, "Consumer confidence is fragile” and argued that economic risks are “tilted to the downside,” adding that global trade frictions and subdued investment could further delay growth.

The Governing Council retained a meeting-by-meeting, data-dependent approach but also reaffirmed its dovish bias on the back of optimistic disinflation expectations and a troubling growth outlook. President Lagarde acknowledged the uncertainty surrounding trade policies, stating that while the inflationary or deflationary effects of tariffs are unclear, "all we know for sure is it will have a global negative impact."

The ECB faces a delicate balancing act as inflation shows signs of re-acceleration. Headline eurozone inflation rose to 2.5% in January, holding above the Bank’s medium-term 2% target for the third month in a row. The rebound was widely expected as the impact of lower energy prices fades. Preliminary data released ahead of the ECB’s decision confirmed that the eurozone economy stagnated in the fourth quarter of 2024, falling short of economists’ expectations for 0.1% growth. This follows a 0.4% expansion in the third quarter, reinforcing concerns about the region’s sluggish recovery.

Moving forward

Despite the BoE’s cautious stance, markets interpreted the downgraded growth outlook and an MPC member’s shift toward a 50-basis-point cut as signs of further easing. Investors are now pricing in nearly three additional 25-basis-point cuts this year, up from two before the meeting (excluding today’s cut). As a result, the pound has weakened against major peers as lower rate differentials reduce its appeal.

There are questions as to whether the ECB will maintain the same pace of cutting at successive meetings, however, the market is certain of another rate cut at their next meeting in March. Recent ECB commentary has been less committal beyond that point, likely to give the Bank flexibility amid potential trade policy shifts.