As expected, the Bank of England (BoE) yesterday cut interest rates by 25 basis points and lowered its inflation forecast for the fourth quarter, Commerzbank’s FX analyst Michael Pfister notes.

BoE to cut rates much more gradually

“More surprising were the forecasts for the coming years: the inflation forecast for 2025 was raised by 0.5 percentage points to 2.7%, while the forecast for 2026 was raised by 0.6 percentage points to 2.2%. At the same time, the BoE now expects growth next year to be almost twice as high as previously thought, at 1.7%. Clearly, the BoE has taken into account the recent UK budget, which is likely to be much more expansionary in the short term than previously expected.”

“In my view, this was a rather hawkish rate cut, which I had not expected. While I could have imagined that the new forecasts would reflect the risks posed by the UK budget, I had thought that, given the BoE’s rather dovish stance in recent years and recent statements by central bank officials, the changes would be smaller, leaving the door open for another rate cut in December. Instead, we have to acknowledge that after yesterday’s decision, another move in December has become rather unlikely. Our economists have therefore adjusted the BoE forecast accordingly.”

“For the Pound Sterling (GBP), this bodes well for the coming months. It shows that the BoE will continue to cut rates much more gradually than the ECB, while the British economy is likely to grow much faster than its eurozone counterpart. Only the new forecasts for 2026 are likely to cause some concern, as the BoE now expects weaker growth and higher inflation in that year. However, a lot can happen between now and then, which is why GBP optimism prevails for the time being.”

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