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(Bloomberg) — The Bank of England is expected to cut interest rates for a third time on Thursday while downgrading its UK growth forecasts and predicting higher inflation this year in a report that will make uncomfortable reading for Chancellor of the Exchequer Rachel Reeves.

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Economists and traders expect the Monetary Policy Committee to press ahead with a quarter-point reduction in its benchmark rate to 4.5%, the lowest level since June 2023. A survey by Bloomberg suggests the vote will be split 8-1 in favor of a cut. The decision is due to be announced at 12 p.m. London time and will be followed by a press conference led by Governor Andrew Bailey.

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Forecasts

In its quarterly Monetary Policy Report, the BOE will update its growth and inflation forecasts, and provide its latest estimate of how quickly the economy can grow without fueling inflation. Dan Hanson and Ana Andrade of Bloomberg Economics believe the BOE will put potential growth at 1%-1.5%, in line with its 1.5% estimate last year.

Actual growth will be downgraded in 2025, 2026 and 2027, most economists predict. In 2025 because the economy has performed poorly. In subsequent years because the market path for interest rates on which the BOE forecasts are based is tighter than in November.

Economists surveyed by Bloomberg see inflation being upgraded this year, as food and energy prices are proving stickier than thought. It suggests Britain is in the grip of “stagflation,” piling pressure on Reeves days after her big speech on growth. Inflation in 2026 and 2027 is expected to be downgraded due to the tight market rate path.

Vote Split

Only one member of the MPC is expected to vote against cutting rates and instead call for rates to stay at 4.75%.  That person is Catherine Mann, an external appointee who has been consistently the most hawkish. Swati Dhingra, another external who is most dovish on the MPC, may vote for a half-point cut.  

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At the last meeting in December, the committee delivered a “dovish hold,” Royal Bank of Canada analysts said. Three members voted for a cut and the tone of the meeting minutes indicated a growing concern about the outlook. Since then, the picture has worsened, with the economy stagnating and the labor market weakening in response to Reeves’ tax-raising budget on Oct. 30.

Rate Bets

The BOE faces a tricky communications challenge, with the market path for interest rates whipsawing since November amid uncertainty about US policy and the spillovers to the UK as well as the impact of the budget. In November and December, Bailey appeared to indicate that four cuts to 3.75% was about right. The rates path the bank used for its February forecast is expected to have had just two. Now three are priced in. 

If the BOE projections show inflation falling far below the 2% target, the implication will be that more than two cuts are needed in 2025. Looser monetary policy would then imply faster growth than in its forecasts.

By sticking to the convention, the BOE may end up appearing to criticize Reeves’ budget and other policy proposals by downgrading growth more sharply than it believes is correct. It could avoid the complication by using a scenario that adopts its preferred path for rates. Last year’s review of the BOE’s forecasting process by former US Federal Reserve chair, Ben Bernanke, recommended the use of scenarios but there has been no indication the BOE will do so.

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“Our inference in November was that February was likely too early for a full suite of scenario forecasts, but clearly any marginal information on these will be a focus too,” said Morgan Stanley economist Bruna Skarica.

Forward Guidance

The BOE will almost certainly stick with language that suggests a cautious approach to easing policy, particularly after the uncertainty caused by US President Donald Trump announcing sweeping tariffs. The BOE has suggested that “gradual” means four quarter-point cuts this year. Given the hawkish tilt that markets have taken since December, maintaining the current guidance would effectively be to push back against market bets.

“In our view February is too early for a decisive dovish shift because inflation is likely to pick up in coming months, which along with rising inflation expectations, point to persistence risks,” Bank of America UK economist Sonali Punhani said.

Others put more weight on signs that the labor market is buckling. “A faster rise in the jobless rate looks likely, with the Bank’s unemployment rate projection rising to 4.6%,” Deutsche Bank UK economist Sanjay Raja said. “A marginal dovish message with the MPC more explicitly signaling the direction of travel on rate cuts is possible.”

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The BOE has refused to reveal its estimate of the neutral interest rate, the level at which monetary policy is neither squeezing nor stimulating the economy. Alan Taylor, the MPC’s newest member, has said it is around 2.75%. The majority of respondents in a Bloomberg survey put it between 3% and 3.5%.

Budget and Tariffs 

The BOE said it would make a full assessment of the budget in February. The indications are that more of the £26 billion ($32.6 billion) increase in National Insurance Contributions will be passed on in price rises than the BOE initially assumed, pushing up inflation. It may also provide an assessment of the series of growth measures Reeves announced last week, including a third runway at Heathrow.

US tariffs against Mexico, Canada and China came too late to be incorporated in the BOE forecasts (Trump has lifted them temporarily on Canada and Mexico but the threat remains if the nations do not meet US demands on border security). Bailey is likely to reiterate his preference for free trade. “I will own up to being an old-fashioned free trader at heart,” he said in November. “Openness to trade in goods and services affects productivity by facilitating competition, innovation and specialization.”

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