GBP/EUR Year-End 2025 Forecast
Consensus from major banks.
File image of Andrew Bailey, credit: Bank of England.
The vote to lower interest rates was resisted by four members of the Monetary Policy Committee (MPC).
The British pound rose against the euro, dollar and other major currencies after the Bank of England lowered interest rates by 25 basis points to 3.75%.
The decision was well anticipated, and the initial GBP rally can be put down to an initial “buy the fact” reaction that we so often see around central bank decisions.
The pound to euro exchange rate (GBP/EUR) rose to 1.1410 from 1.1388 ahead of the decision’s release.
The pound to dollar exchange rate (GBP/USD) rose to 1.3377 from 1.3352.
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The vote was close at 5-4, confirming a good chunk of the MPC are still cautious.
Megan Greene, Clare Lombardelli, Catherine L Mann and Huw Pill all preferred to maintain Bank Rate at this meeting, placing greater weight on prolonged inflation persistence.
They think structural factors will limit inflation’s slide, acknowledging that although recent progress on disinflation has been made, “the current and forward-looking evidence on services inflation, wage growth and inflation expectations remained above target-consistent levels.”
The market sees another rate cut falling by April next year. Ahead of the decision, and following Wednesday’s inflation data, the odds of a second cut in 2026 rose to 70%.
However, this is lower now that we know there are members of the MPC who are concerned that inflation persistence will be a feature for some time to come.
As the odds of that second cut are reduced, so the pound recovers.
In a statement, the Bank also reaffirmed that caution was warranted when considering lowering rates further: “Bank Rate is likely to continue on a gradual downward path. But judgments around further policy easing will become a closer call.”
That being said, there were some ‘dovish’ developments that will limit sterling’s recovery.
Notably, the Bank says inflation “is now expected to fall back towards target more quickly in the near term.”
It sees “building slack in the labour market” and “pay growth and services price inflation have continued to ease.”
It adds “the risk from greater inflation persistence has become somewhat less pronounced.”
Alsso, “the risk to medium-term inflation from weaker demand remains.”
And, “Bank staff to lower their expectation for CPI inflation to closer to 2% in 2026 Q2.”
So we’re still on for another rate cut in the first half of next year. However, a second cut is still a matter of conjecture.
For sterling, that is enough to offer some support.
