By Brian Swint

The Bank of England is widely expected to keep interest rates unchanged this week, in line with the Federal Reserve's action on Wednesday. It is still likely to cut rates more than the Fed later this year.

Like its U.S. counterpart, the U.K. central bank expects inflation to continue to slow over the next few months, but it wants to be sure it is on track and avoid lowering borrowing costs too quickly.

However, the British economy has been much weaker than that of the U.S. It expanded just 0.1% in the fourth quarter after flatlining in the third quarter, narrowly avoiding a recession. Gross domestic product fell again in January, figures showed last week.

While worries about Russia's war in Ukraine and the economic impact of President Donald Trump's tariffs on global growth affect the U.K., the economy also has homegrown problems. Prime Minister Keir Starmer's government, which took office in July, has struggled to restore confidence in the outlook for consumers and businesses. Worried that markets might react unfavorably to big spending plans, it has announced a series of tax increases to help pay for social services and hasn't made a big push to stimulate growth.

The BOE, for its part, said it is taking a "gradual and careful approach" to lowering rates, as inflation is currently a full percentage point above the 2% target. Nevertheless, with the economy stagnating, the direction of travel for interest rates is clear.

"We expect the bank to remain on hold in March, before cutting again in May" and to then cut at every other meeting "between now and February 2026, inclusive, for a terminal rate of 3.5%," said economists at Nomura led by George Buckley.

That pace of cuts contrasts with the Fed's anticipation of just two more quarter-point cuts this year, according to the latest Summary of Economic Projections, released on Wednesday.

BOE policymakers at their last decision in January reduced the benchmark rate by a quarter point to 4.5%. The surprise was that one of the nine voters, Catherine Mann, swung from previously voting for fewer rate cuts to supporting a bigger half-point move. A minority of Monetary Policy Committee members are likely to vote for a reduction this month as well.

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

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March 20, 2025 03:22 ET (07:22 GMT)

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