Bank of England edges closer to rate cut

Key takeaways

• BOE signals interest rates could fall
• Markets reassess AI growth expectations
• Rate volatility reshapes market leadership

Monetary policy stayed front and center this week as major central banks kept rates unchanged. What stood out was not the decisions themselves, but how economic momentum is diverging across regions.

The European Central Bank held rates at 2% for a fifth straight meeting. The decision reflects an economy that is no longer weakening but not accelerating either. Services activity has picked up modestly, while manufacturing remains in contraction, though at a slower pace. Meanwhile, inflation pressures continue to ease. Taken together, the picture points to stabilization rather than renewed growth.

In the UK, the Bank of England (BOE) also left rates unchanged at 3.75%, but the vote was close. A narrow 5-4 split suggests policymakers are increasingly divided. Updated forecasts showed cooling inflation and slower growth ahead. In our view, this puts the UK closer to a rate cut than other developed markets and highlights a growing gap in policy direction with other central banks.

The latest economic data from China offered few clear signals. Services activity remained slightly expansionary, but manufacturing momentum appears to have stalled. Consumer demand also remains soft.

This combination suggests policymakers are likely to continue with targeted support rather than broad stimulus. In our view, that limits the near-term boost China can provide to global growth-sensitive assets.

In the U.S., the January employment report was delayed by a brief government shutdown, leaving markets with less fresh data than usual. Instead, investors focused on recent trends that point to cooling labor demand, slower wage growth, and easing inflation.

Adding to that picture, outplacement firm Challenger, Gray & Christmas reported that announced layoffs in January were the highest for that month since 2009. The cuts were largely driven by restructuring and contract losses and were concentrated among a small number of large firms. This underscores the uneven nature of adjustments in the U.S. labor market.

Artificial intelligence remained a major market theme, but the tone shifted this week. New product launches raised questions about how quickly advanced AI tools could spread across the industry and what that might mean for pricing power.

As a result, investors became more sensitive to valuations across the software sector. Software stocks moved lower in both the U.S. and international markets. Importantly, this pullback appears driven more by sentiment and valuation reassessment than by changes in near-term earnings expectations.

AI remains a powerful long-term growth driver. Still, recent market moves show that not all companies will benefit equally. Infrastructure providers tied to AI development have held up better, while companies selling AI-based applications face tougher questions about how durable their revenues will be.

Market performance was uneven this week. Long-duration growth stocks in particular came under pressure as investors reassessed the outlook for monetary policy amid mixed data and ongoing uncertainty.

Traditional safe havens also behaved differently than usual. Gold prices softened alongside risk assets after a strong run-up in recent weeks before some “buy the dip” buyers appeared to step in and provide support into the end of the week. That suggests a shift in positioning driving heightened volatility rather than a sudden change in the broader economic picture.

U.S. Treasury yields were volatile, especially in the middle and long parts of the curve. Political uncertainty and questions around the timing of future rate cuts weighed more heavily than changes in growth expectations. In our view, these moves reflect policy repricing and reduced visibility, not a fundamental shift in the economic outlook.