Bank of England’s Interest Rate Cuts Stir Debate as FTSE 100 Climbs Toward Record High Amid Inflation

20 May 2025

REUTERS/Suzanne Plunkett

LONDON - The Bank of England’s recent monetary policy moves have reignited debate among economists, investors, and market analysts. In a bid to stimulate economic growth, the Bank has reduced interest rates to 4.25%, a notable shift after months of steady tightening to counter inflation. While this policy pivot has been welcomed by some market participants, it is also drawing sharp caution from within the Bank itself.

Huw Pill, the Bank’s Chief Economist, warned that the pace of rate reductions could be premature. Speaking at a recent event, Pill emphasized that inflationary pressures in the UK economy remain persistent and cautioned that aggressive rate cuts may undermine the central bank’s long-term goal of anchoring inflation close to the 2% target. “The job isn’t done yet,” he remarked, noting that price stability needs to be achieved in a more sustainable manner, rather than through abrupt policy easing.

Despite such concerns, financial markets reacted positively. The FTSE 100 index gained 0.6% on Tuesday, rising to its highest level since early March and edging closer to its all-time peak. The rally has been driven by strong corporate performance across key sectors. Engineering group Diploma surged over 7% after raising its profit outlook for the year, and Smiths Group rose more than 4% following better-than-expected results. These earnings reports have injected fresh optimism into UK equities at a time of macroeconomic uncertainty.

However, the backdrop remains complex. Economists are closely watching the upcoming inflation data for April, which is expected to show a jump from 2.6% in March to 3.3%, primarily due to higher energy and fuel costs. If the data confirms a resurgence in consumer prices, it may complicate the Bank of England’s plans to continue with a dovish stance. Energy costs, which had briefly stabilized, have begun to rise again posing a new challenge for both households and industrial sectors.

Analysts are divided on the way forward. Some argue that cutting rates now is necessary to support a slowing economy and prevent a deeper downturn, especially as consumer confidence remains fragile and global growth shows signs of cooling. Others believe that the Bank risks falling behind the curve on inflation, potentially eroding its credibility and forcing even sharper corrective action later.

Meanwhile, sterling remained steady against the US dollar, and gilts saw minor movements as investors weighed the implications of the rate cut and the upcoming inflation print. Market expectations for further rate reductions later this year remain mixed, with some forecasting a hold at current levels until inflation trends become clearer.

In summary, the UK economy is at a crossroads. The Bank of England’s strategy reflects a delicate balancing act easing financial conditions to foster growth while remaining vigilant against the risk of entrenched inflation. As the FTSE 100 inches toward record territory and new economic data emerges, all eyes will remain on Threadneedle Street for signs of how the central bank will navigate the months ahead.