By Brian Swint

The Bank of England cut interest rates on Thursday as the outlook for economic growth dims, taking a different path from the Federal Reserve.

The U.K. central bank lowered its key rate to 4.5% from 4.75%, as expected. But surprisingly, two policy makers voted for an even bigger half-point cut. That pushed the pound down against the U.S. dollar, sending it 0.9% lower to $1.238.

"Based on the Committee's evolving view of the medium-term outlook for inflation, a gradual and careful approach to the further withdrawal of monetary policy restraint is appropriate," the U.K. central bank said in a statement.

One of the policy makers to support a bigger cut was Catherine Mann, who had previously been one of the more hawkish members of the rate-setting panel, meaning she tended to prefer higher rates than others. The other dissenter was Swati Dingra, who has a record of supporting lower rates.

The BOE decision follows a quarter-point cut from the European Central Bank in Frankfurt last week. The Fed, worried that inflation isn't yet conquered amid the prospect of trade wars and tariffs, kept interest rates on hold at the end of last month.

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 resulting from energy prices and a weak currency. That means the BOE will probably steadily decrease borrowing costs while the Fed pauses.

If central banks in Europe are lowering rates while the Fed stands pat, it 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 about $1.24, whereas it was worth $1.34 at the end of October.

BOE Governor Andrew Bailey, when asked about the impact of Trump's plans to impose tariffs on U.S. imports, said it was impossible to judge the effect on the U.K. because there are still too many unknowns. The level of the tariffs and the impact on exchange rates are examples.

"It remains unclear what form global trade policies might ultimately take, and the MPC's February projection is not conditioned on any change in global tariffs," Bailey said.

The U.K. inflation rate came in at 2.5% in December, and the BOE said it could keep rising in the short term to 3.7% because of energy prices. That's above the 2% target and higher than the rates seen in the second half of last year. Nevertheless, policy makers don't anticipate a lasting effect on prices and see the rate returning to target in the medium term.

At the same time, official figures next week are expected to show gross domestic product was virtually unchanged in the fourth quarter. The BOE noted that growth had been weaker than expected, but still sees it picking up in the middle of the year.

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

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February 06, 2025 09:20 ET (14:20 GMT)

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