How might the Bank of England's rate decision impact UK markets in March 2025?

What to expect from the March Bank of England meeting

The Bank of England (BoE) Monetary Policy Committee (MPC) is scheduled to announce its latest interest rate decision on Thursday, 20 March 2025. Following a 0.25 percentage point reduction in February, which brought the Bank Rate down to 4.5%, market consensus suggests that the MPC will maintain this rate in the upcoming meeting.

This anticipated pause aligns with the Bank's self-described "gradual and careful" approach to monetary policy adjustments, as repeatedly emphasised by Governor Andrew Bailey in recent communications. The MPC appears committed to a measured pace of easing that balances inflation concerns with growth objectives.

The decision to hold rates would mark the Bank's cautious stance amid persistent economic uncertainties both domestically and globally. Financial markets have largely priced in this outcome, with swap markets indicating a high probability of no change in March.

Deputy Governor Dave Ramsden has recently underscored the need for caution in future rate reductions, highlighting balanced inflation risks and uncertainties in the labour market that warrant a deliberate approach to monetary policy normalisation.

Recent economic indicators influencing the decision

The UK economy unexpectedly contracted by 0.1% in January 2025, primarily due to weaknesses in the production and construction sectors. This disappointing figure follows modest growth in the previous quarter and raises concerns about economic momentum in the first part of 2025.

Inflation data has shown progress toward the Bank's 2% target, though the journey remains somewhat uneven. Core inflation, which excludes volatile food and energy prices, has proven more persistent than headline figures, maintaining the MPC's cautious outlook.

The services sector has shown modest improvement despite overall economic contraction, providing a silver lining for policymakers concerned about growth prospects. This divergence across sectors creates a complex picture for the MPC to evaluate.

Additionally, the Organisation for Economic Co-operation and Development (OECD) has recently revised down its UK gross domestic product (GDP) growth forecasts to 1.4% for 2025 and 1.2% for 2026. These downward revisions cite recent weak economic performance and potential impacts from escalating global trade tensions.

Market implications of the Bank of England's decision

British stocks may experience volatility around the announcement as investors digest the MPC's latest economic projections and forward guidance. The British pound sterling will likely be sensitive to any shifts in the Bank's tone or guidance about future rate decisions. Currency traders should watch for changes in the language around inflation risks and economic growth projections that might signal the pace of future cuts.

UK government bonds (gilts) typically respond strongly to monetary policy decisions, with yields potentially moving based on the MPC's assessment of inflation risks and growth outlook. Any surprise in the voting pattern among MPC members could trigger significant market moves.

The UK housing market, which has shown sensitivity to interest rate expectations, may also react to signals about the future path of monetary policy. Mortgage rates and housing activity indicators often respond to changes in the Bank's forward guidance.

Future rate cut expectations for 2025

Despite the anticipated hold in March, markets are pricing in further rate cuts later in 2025 as inflation continues to moderate and economic growth remains subdued. Current expectations suggest two to three additional 25 basis point (bp) reductions before year-end.

The timing of these expected cuts remains uncertain and highly dependent on incoming economic data. The MPC has emphasised its data-dependent approach, making each economic release increasingly significant for market participants trying to anticipate the next move.

Governor Bailey has stressed that future decisions will be made on a "meeting-by-meeting" basis, avoiding any pre-commitment to a specific policy path. This stance provides flexibility but creates some uncertainty for forex trading and interest rate markets.

The Bank's Monetary Policy Report, published alongside the decision, will provide updated economic projections that may offer clues about the likely timing of future rate adjustments. These forecasts for growth, inflation, and unemployment will be scrutinised for insights into the MPC's thinking.

Comparison with other central banks' policies

The Bank of England's approach appears broadly aligned with other major central banks, including the US Federal Reserve (Fed), which is also expected to maintain a cautious stance on rate reductions in the near term. This policy synchronisation has implications for global currency markets.

The European Central Bank (ECB) has recently signaled its intention to begin easing monetary policy, potentially moving ahead of the BoE in its rate cutting cycle. This divergence could affect the pound's performance against the euro in coming months.

Central banks globally are navigating similar challenges of moderating inflation while supporting economic growth amid various geopolitical and trade uncertainties. This shared experience is creating a complex international monetary policy landscape.

Differences in economic performance and inflation dynamics across regions may lead to varying speeds of monetary policy normalisation, creating potential opportunities for CFD traders looking to capitalise on interest rate differentials between currencies.

Voting pattern expectations for the MPC

The MPC consists of nine members who vote individually on interest rate decisions, and their voting pattern can provide insights into future policy direction. In February's meeting, the committee voted 7-2 in favor of cutting rates, with two members preferring to hold.

For the March meeting, analysts expect a similar or possibly more unified vote in favor of maintaining the current 4.5% rate. Any shift in the voting pattern could signal changing sentiment within the committee about the balance of risks.

External MPC members occasionally take more hawkish or dovish positions than the Bank's internal leadership, making their votes particularly interesting for market participants attempting to gauge the committee's overall bias.

The minutes of the meeting, released alongside the decision, will provide detailed reasoning behind each member's vote. These insights often move markets as they reveal nuances in the committee's assessment of economic conditions and risks.

Impact on the UK housing and mortgage markets

The housing market remains sensitive to interest rate expectations, with mortgage approvals and house price growth closely tied to the Bank's policy decisions. The anticipated rate hold in March may help stabilise mortgage rates after recent declines.

Fixed-rate mortgages have already begun incorporating expectations of future rate cuts, with some lenders reducing their longer-term rates ahead of actual Bank Rate reductions. This forward-looking pricing demonstrates how monetary policy expectations filter through to the real economy.

First-time buyers may benefit from the increased certainty provided by a stable interest rate environment, allowing more confident planning around housing decisions. This stability could support transaction volumes which have been subdued in recent quarters.

The rental market also feels the impact of interest rate decisions, as landlords' financing costs directly influence rental prices. The Bank's gradual approach to rate cuts may slow the pace of rental inflation as financing costs ease incrementally.

Economic outlook and challenges ahead

The OECD's downward revision of UK growth forecasts highlights ongoing challenges facing the economy, including productivity concerns, the lingering effects of Brexit, and potential disruptions from escalating global trade tensions.

Inflation risks remain balanced but significant, with wage growth and service sector inflation still running above levels consistent with the Bank's 2% target. These persistent pressures justify the MPC's cautious approach to monetary policy easing.

Labour market dynamics present a complex picture, with employment levels remaining robust despite economic headwinds. However, signs of cooling in job creation and wage growth may eventually provide the MPC with more comfort to accelerate its rate-cutting cycle.

The UK's future trading relationships, particularly in light of evolving global trade policies, remain a source of uncertainty that could impact inflation through import prices and economic growth through export demand. These external factors will continue to influence the Bank's policy calculations throughout 2025.