By Brian Swint

The Bank of England is widely expected to lower interest rates on Thursday as the outlook for economic growth dims, taking a different path from the U.S. Federal Reserve.

Investors are pricing in a 97% chance that the U.K. central bank lowers its key rate to 4.5% from 4.75%, according to data on LSEG. The decision follows a quarter-point cut from the European Central Bank in Frankfurt last week. The Fed, worried that inflation is not yet conquered amid the prospect of trade wars and tariffs, kept interest rates on hold.

This year, monetary policy in the U.S. and Europe is likely to diverge. Whereas the U.S. is experiencing stronger expansion and signs of demand-driven price gains, the U.K. is coping with stagnation and inflation that is propped up by energy prices and a weak currency. That means the BOE will probably steadily decrease borrowing costs while the Fed pauses.

"It's heavily implied that the Bank expects once-per-quarter cuts for the rest of this year," said ING economist James Smith. "That's our base case."

That central banks in Europe are lowering rates while the Fed stands pat will help push up the dollar, which has also risen substantially since President Donald Trump was re-elected in November. A British pound now buys $1.25, whereas it was worth $1.34 at the end of October.

BOE Governor Andrew Bailey will host a press conference in London to explain the decision. He will also discuss new forecasts for growth and inflation, which are updated quarterly. In November, policymakers predicted inflation would remain slightly elevated but also saw economic growth slowing and the labor market weakening. Since then, the growth outlook seems to have worsened.

The U.K. inflation rate came in at 2.5% in December. That's above the 2% target and higher than the rates seen in the second half of last year. At the same time, official figures next week are expected to show gross domestic product was virtually unchanged in the fourth quarter.

"U.K. data is weakening, and the BOE might indicate speedier cuts to come," said economists at RBC Capital Markets led by Peter Schaffrik.

Write to Brian Swint at brian.swint@barrons.com

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February 05, 2025 09:31 ET (14:31 GMT)

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