The Bank of England cuts interest rates, and the pound sterling exchange rate plummets

On February 6, the Bank of England announced a 25 basis point interest rate cut, lowering the base rate to 4.5%. This is the third interest rate cut by the Bank of England since the current round of interest rate cuts began in November 2024. In November 2024, the Bank of England cut its base rate from 5.25% to 5% for the first time, taking an important step in policy adjustment; in December of the same year, the Bank of England cut interest rates again by 25 basis points, lowering the base rate to 4.75%.

According to the statement of the Bank of England, the Bank of England’s Monetary Policy Committee passed the proposal to cut interest rates by 25 basis points with a majority of 7 to 2. Two of the committee members were more “radical” and hoped to further reduce the interest rate to 4.25%. At a press conference, Bank of England Governor Bailey said that as inflation continues to decline, the Bank of England has room to further reduce interest rates, but the extent and speed of future interest rate cuts will be evaluated meeting by meeting. He stressed that the current world is full of uncertainty, and the road ahead for the British economy will also be full of twists and turns.

In addition to the interest rate cut decision, the economic forecast report released by the Bank of England on the same day also attracted attention. The report shows that the Bank of England expects that the inflationary pressure in the UK will remain this year. After the consumer price index (CPI) fell to 2.5% in December last year, it is expected to rise rapidly to 3.7% in the third quarter of this year, and then fall back again. At the same time, the Bank of England has significantly lowered its economic growth forecast, adjusting the GDP growth rate in 2024 from 1% to 0.75%, and the growth rate in 2025 from 1.5% to 0.75%.

After the Bank of England announced the interest rate cut decision and its latest forecast for the British economy, the pound sterling fell against the US dollar. On February 6, the pound sterling fell against the US dollar by 1.2% at one point, reaching a low of 1.2361, the largest single-day drop since January 2. In addition, many analysis agencies believe that the downward pressure on the pound may increase further.

Analysts at JPMorgan Chase pointed out that in the case of insufficient economic growth momentum and high inflation in the UK, the appreciation space of the pound sterling against the US dollar will be greatly limited. Analysts at TD Securities also said in a report that the pound faces the risk of further decline after the Bank of England hinted that it would be less cautious about cutting interest rates that day.