By David Milliken and Andy Bruce
LONDON, Feb 6 (Reuters) - The Bank of England reduced interest rates by a quarter of a percentage point on Thursday, citing a temporary nature of the sharp upward revision to its inflation forecasts for this year, while two officials advocated for a more substantial rate cut amidst weaker growth.
The adjustment to 4.5% aligned with economists' expectations in a Reuters poll, yet the two external members, Catherine Mann and Swati Dhingra, voted for a larger rate reduction to 4.25%, contrary to market predictions.
Up to now, Mann had typically been against rate cuts, although she had previously mentioned the necessity for a shift towards a more proactive policy easing at some point.
Bank of England Governor Andrew Bailey stated that the BoE would be closely monitoring the UK economy and global developments, adopting a gradual and cautious approach to further rate reductions. This contrasts with December's language, which only referenced a gradual approach.
Pressured by concerns over finance minister Rachel Reeves' employer tax hikes, the risk of a potential global trade conflict led by U.S. President Donald Trump, and rising expenses, the British economy has shown minimal growth since mid-2024. The BoE warned of a likely 0.1% contraction in the fourth quarter.
This cut represents merely the third since the BoE commenced decreasing borrowing costs from a 14-year peak in August, maintaining British rates among the highest for advanced economies and slightly above the U.S. Federal Reserve's range of 4.25-4.5%.
Last month, economists surveyed by Reuters had predicted four quarter-point rate cuts this year, lowering the main interest rate to 3.75%, while recent market expectations leaned more towards cuts to 4%.
Minutes from February's decision revealed varied opinions among policymakers regarding future rate reductions due to weak productivity increasing inflation risks, emphasizing the need for caution.
Britain's economic prospects have worsened since the BoE's November forecasts, with inflation projected to peak at around 3.7% in the third quarter of this year. The BoE anticipates inflation to not retreat to its 2% target until the final quarter of 2027, half a year later than previously forecasted.
The central bank has halved its growth forecast for 2026 to 0.75%, reflecting subdued business and consumer sentiment and sluggish productivity growth, while slightly revising upwards the growth estimates for 2026 and 2027.
Concerning future U.S. tariffs, the BoE noted uncertainty regarding their impact on British inflation, anticipating that elevated global tariffs would lead to slower growth, even if Britain is not directly affected.
These projections are rooted in market expectations for a slower pace of rate cuts compared to November, with rates anticipated to reach around 4.25% by year-end, versus the earlier expectation of about 3.75%.
The two policymakers advocating an immediate rate cut to 4.25% presented differing rationales. One policymaker emphasized an "activist" approach to signal clearly to markets, while expecting continued monetary policy stringency. The other highlighted weak growth as a factor likely to prompt inflation to align with the target over the medium term.
(Reporting by David Milliken and Andy Bruce)
(Reporting by David Milliken, Andy Bruce, and Suban Abdulla)
Keywords: BRITAIN BOE/