While most financial experts expect the Bank of England to take its time with interest rate cuts, Morgan Stanley is betting on a much bolder approach. The investment bank predicts the BOE will start slashing rates in December 2025, jumping ahead of rivals by about two months.
Morgan Stanley sees a busy year ahead for the central bank, forecasting five separate rate cuts throughout 2025. These cuts would happen in February, March, May, August, and November. By the end of 2025, they expect rates to drop to around 3.5% from current levels. Think of it like turning down the economic thermostat gradually throughout the year.
Morgan Stanley forecasts five BOE rate cuts in 2025, gradually turning down the economic thermostat to 3.5%.
This prediction stands out like a red flag in a sea of caution. Most other analysts expect only one or two cuts in 2025, making Morgan Stanley’s forecast of five cuts seem quite aggressive. The firm’s terminal rate target of 2.75% also sits well below what competitors are predicting.
What’s driving this bold call? Morgan Stanley points to some troubling economic signs on the horizon. They expect UK growth to slow down considerably while unemployment climbs higher toward late 2025. This creates a tricky situation where the economy struggles but inflation stays stubborn, like a car engine that’s sputtering but won’t completely stall. The zero economic growth reported in Q3 2024 reinforces concerns about the UK’s economic trajectory.
The bank believes this challenging economic mix will force policymakers to act sooner rather than later. They’re betting that weak consumer demand and external uncertainties will push the BOE toward faster action. It’s a bit like a doctor prescribing stronger medicine when gentler treatments aren’t working fast enough. The Monetary Policy Committee has shown close debate and vote splits, indicating uncertainty about the timing of future rate decisions.
Morgan Stanley also sees this as part of a global trend. They expect major central banks worldwide, including the European Central Bank and Federal Reserve, to coordinate easing policies throughout 2025. This global approach could make the BOE’s decisions easier to justify.
Market skeptics remain unconvinced, suggesting the BOE will move more carefully. Interest rate swap markets currently price in minimal cuts, showing how much Morgan Stanley’s forecast differs from conventional wisdom. Only time will tell whether this contrarian bet pays off.
