Bank Of England Seen Moving Closer To Rate Cuts

Pound Sterling remains sensitive to interest-rate expectations as investors assess when the Bank of England will begin cutting borrowing costs, with fresh analysis from Pantheon Macroeconomics pointing to a shift toward earlier policy easing that could influence the currency’s near-term direction against both the euro and the US dollar.

Pantheon analysts argue that the Bank of England has moved decisively closer to easing, even though Bank Rate was left unchanged at 3.75% this month.

The Monetary Policy Committee split five to four in favour of holding rates, a more dovish outcome than markets had expected and one that Pantheon sees as an important signal that policy is turning.

Crucially, the Bank cut its two-year-ahead inflation forecast by 30 basis points to 1.8%, below target, implying that policy is now restrictive enough to bring inflation back under control without further tightening.

Pantheon interprets this downgrade as justification for at least one rate cut this year, and has brought forward its call for the first move to March, from April previously, citing Governor Andrew Bailey’s willingness to act before inflation data fully confirm the slowdown.

The guidance shift also matters for Sterling.

The MPC now says Bank Rate is “likely to be reduced further”, replacing earlier language that pointed to a gradual downward path. Pantheon reads this as signalling that one cut is effectively locked in, while additional easing will depend on how wages and prices evolve.

While the Bank has placed heavy weight on rising slack in the labour market and weaker payrolls, Pantheon is more cautious, arguing that pay growth remains sticky and that inflation could overshoot the Bank’s near-term projections.

That tension, in their view, limits the scope for a prolonged easing cycle.

For Pound Sterling, the implication is a near-term policy drag, but not an open-ended dovish shift.

The UK economists expects a March cut to weigh modestly on the currency, particularly against the euro, but argues that resilient growth, firm wages and the risk of inflation persistence should prevent the Bank from cutting aggressively beyond that point.

As a result, analysts see Pound Sterling vulnerability concentrated around the first rate cut, rather than a sustained depreciation trend driven by policy divergence.