The Bank of England’s path to monetary easing has become more complicated, with the economy defying expectations by expanding 0.1% in the fourth quarter and delivering an unexpectedly strong 0.4% monthly growth figure in December, driven by the service sector. However, it is important to appreciate the economic backdrop of these figures, as the UK economy remains fundamentally weak, caught in a prolonged period of stagnation where even the smallest upside surprises are magnified in significance. The fact that the economy narrowly avoided a technical recession should not obscure the reality that real wages have only recently begun to recover from a continued period of erosion. Additionally, business investment declined by 3.2% in Q4 2024, underscoring the fragility of the broader recovery, while borrowing costs continue to weigh heavily on both consumer and corporate balance sheets.

Despite this, the latest data challenges the assumption that the Bank of England will be in a position to deliver rate cuts as early as March, as had been anticipated by some in the market in recent weeks. Instead, a more patient approach from policymakers now appears increasingly likely, particularly given the persistence of core inflation pressures and the risk that premature easing could reignite price pressures before they are fully under control. The latest Monetary Policy Committee meeting saw the Bank Rate reduced by 25bps to 4.5% in February 2025, but Governor Bailey has since indicated that policymakers remain cautious. While inflation is on a downward trajectory, the BoE now projects a temporary uptick to 3.7% in Q3 2025 before stabilising, suggesting that any premature moves could undermine the broader disinflationary trend.

Investors are beginning to factor in the possibility that the Bank may opt to keep rates on hold for longer than previously anticipated. A repricing of expectations is likely to extend beyond the immediate outlook, as the market will now question whether the Bank will ultimately be able to deliver the degree of monetary easing that had been widely forecast for 2025. For policymakers, while the broad disinflationary trend remains intact, concerns over entrenched wage pressures and sticky core inflation continue to loom large, particularly given the UK’s uniquely acute exposure to supply-side constraints and labour market tightness. Furthermore, the UK continues to underperform its G7 peers, with long-term structural challenges limiting its ability to generate sustained momentum. Against this backdrop, the Bank of England will be keen to avoid misinterpreting short-term fluctuations as evidence of a more durable recovery.

The risk of overreacting to a single data point remains high, particularly given the volatility in monthly growth figures throughout the past year. Ultimately, this latest growth surprise may delay, but not derail, the Bank’s eventual pivot towards monetary easing. While the narrative of a UK economy in urgent need of rate cuts may have lost some of its immediacy, the underlying fragility of the growth outlook suggests that policymakers will still need to tread carefully in the months ahead.