Markets Push Back Expectations for More Bank of England Rate Cuts in 2025 After Thursday's Policy Decision, Says Deutsche Bank

08:52 AM EDT, 08/07/2025 (MT Newswires) -- The Bank of England cut Bank Rate by a quarter-point, taking the key Policy Rate down to 4.0% as expected -- its fifth rate cut of the cycle and a new cyclical low, said Sanjay Raja, Deutsche Bank's chief U.K. economist.

However, Thursday's decision will likely usher in a rethink of the policy path ahead, stated Raja. Markets have pushed back expectations for further rate cuts this year. Uncertainty on the policy path ahead has risen even further.

Divisions within the BoE's Monetary Policy Committee (MPC) have heightened even more, noted Deutsche Bank's economist. While the bank expected a three-way split in the vote tally, Thursday's decision was more finely balanced than it expected.

A 4-4-1 vote tally brought about a second vote count to deliver a majority rate cut of 5-4. This was "historic," pointed out Raja. The internal camp is now even more divided with Deputy Governor Clare Lombardelli and Chief Economist Huw Pill opting to maintain Bank Rate at 4.25%.

The BoE's projections lean hawkish, added Raja. The near-term consumer price index is expected to peak at 4% year over year. The BoE also raised its medium-term CPI projections at both the two- and three-year forecast horizons. Importantly, despite the faster loosening in the labor market -- as evidenced by falling payrolls, a rising unemployment rate and a slowdown in private sector wage growth -- the MPC toned down its expectations of spare capacity in the medium-term. Put differently, rates now seem less restrictive.

The trade-off between higher inflation and a weaker labor market has heightened uncertainty around the policy path, according to Deutsche Bank. The MPC retained its language for a 'gradual and careful' withdrawal of monetary policy. The BoE also reiterated that monetary policy wasn't "on a pre-set path."

The MPC is leaning more on upside inflation risks -- as opposed to downside labor market risks when thinking about its calibration of monetary policy, according to Raja.

Dynamics within the MPC are shifting, said the economist. Bank Rate is now seen as less restrictive than before -- with the MPC less keen to emphasise that rates remain "sufficiently restrictive." This, in Raja's view, is a "meaningful" shift in tone.

With headline CPI expected to push higher to 4% year over year, concerns around inflation expectations -- and ultimately, second-round effects -- have risen. The odds of further rate cuts have fallen -- particularly in Q4 2025.

The path for near-term rate cuts has inexplicably narrowed. While the path of Bank Rate remains down, in Raja's view, the next few months mark a murkier path on the scale and pace of tightening.

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