The Bank of England cut interest rates by a quarter of a percentage point on Thursday, judging a sharp upward revision to its inflation forecasts for this year will prove temporary.

The cut to 4.5% was in line with economists’ expectations in a Reuters poll, but two officials called for a bigger rate cut against a backdrop of weaker growth.

Sterling fell to $1.2370, from $1.2425 just before the decision and was down over 1% on the day. The pound also weakened against the euro to last trade around 83.74 pence compared 83.40 pence earlier.

UK government bond yields fell, with two-year yields last down 6 basis points at 4.08% versus 4.13% just before the rate decision.

London’s blue-chip FTSE and the mid-cap FTSE 250 stock index accelerated their gains and were last up over 1.5% each.

Comments:
Zara Nokes, Global Market Analyst, JP Morgan Asset Management, London:
“With December’s softer-than-expected inflation print having fuelled market expectations for a cut, the Bank of England likely felt it had no other choice today. The distribution of votes showed high conviction in the call, yet this approach is not without risks.

“While economic activity is clearly slowing, inflation pressures are not. Inflation expectations have picked up as a result of higher energy prices, strong wage growth and businesses signalling that they intend to charge higher prices in response to October’s tax hike.

“The growth outlook might also not be as bad as business surveys suggest, with the large increase to public services spending announced in the Autumn Budget likely to provide a tailwind to growth this year, offsetting some of the private sector weakness. Against this backdrop, the Bank must be resolute in its commitment to bring inflation back to target.

“Rate cuts might be popular in the short term but, ultimately, there will be a higher price to pay further down the line if inflation is not stamped out now.”

Zsolt Kohalmi, Deputy CEO & Global Head of Real Estate, Pictet Alternative Advisors, London:
“Interest rates are crucial to the real estate recovery story. UK rates are currently between the U.S., which are higher, and continental Europe, which are lower.
“For a recovery in the UK real estate market to really take place, though, UK rates need to come down significantly and be closer to the European rate curve outlook, rather than the U.S. For now, this is far from certain, but would be a bonus for investors in UK real estate.”

Michael Field, Chief European Strategist, Morning Star, Amsterdam:
“With plentiful equity market opportunities for investors in the UK, we believe further interest rate cuts over the course of 2025 will lighten the load for consumers and businesses alike. This should create a more supportive economic backdrop for commerce generally.”