UK GDP Miss and Sticky Inflation Complicate BoE’s Path to Rate Cuts
Article published on March 18th, 2025 3:00AM UK Time
The latest UK GDP data came in softer than expected, with January GDP contracting by -0.1% MoM, missing consensus estimates of +0.1%. This decline was driven by weakness in manufacturing, oil and gas extraction, and construction, although services remained a relative bright spot with 0.1% growth in the month.
At the same time, the UK’s inflation picture has worsened, making it harder for the Bank of England (BoE) to justify near-term rate cuts.
Sticky Inflation: A Major Hurdle for BoE Doves
📊 Headline CPI rose to 3.0% YoY in January, exceeding the previous print of 2.5%.
📊 Core CPI accelerated to 3.7% YoY, up from 3.2% prior
📊 Services inflation jumped to 5.0% YoY from 4.4%, underscoring persistent domestic price pressures.
These inflation readings are well above the BoE’s comfort zone, particularly in services, which policymakers view as a key gauge of underlying inflationary trends.
BoE Rate Expectations: Markets Cautiously Adjust
While the GDP miss strengthens the argument for rate cuts later in the year, the inflation data suggests the BoE will need to see clear signs of disinflation before cutting aggressively.
📉 BoE rate pricing now sees 26bps of easing priced by June, slightly higher than before but still short of a full 25bps cut.
📉 By December 2025, markets expect just over 54bps of total easing, far from the 75bps cuts seen in previous cycles.
March 20 BoE Meeting: Key Takeaways
1️⃣ Mann’s Dovish Vote Could Gain Support
- Catherine Mann voted for a 50bps cut last month, citing demand concerns.
- If more policymakers shift dovish, rate cut expectations could accelerate.
2️⃣ Inflation Must Fall for the BoE to Justify Cuts
- The rise in services inflation to 5.0% YoY is a major concern.
- Unless inflation moves decisively lower in the coming months, the BoE will likely maintain a cautious stance on rate cuts.
3️⃣ GBP at Risk if Market Rethinks Rate Path
- If inflation remains sticky, markets may reduce rate cut bets, supporting GBP.
- Conversely, if data weakens further, a dovish shift in BoE voting could trigger renewed GBP downside.
Bottom Line: The BoE Stays in Wait-and-See Mode
The softer GDP print strengthens the case for easing, but inflation trends remain too strong for an imminent rate cut. Unless inflation starts moving meaningfully lower, the BoE will likely stick to a cautious, data-dependent approach, with markets now looking to the March 20 meeting for further signals.