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In a significant move that signals mounting concerns over economic growth, the Bank of England has reduced its base interest rate to 4.5%, whilst simultaneously cutting its UK growth forecasts for 2025 by half. The decision, backed by a majority of seven to two on the Monetary Policy Committee (MPC), marks a crucial shift in the central bank’s stance amid challenging economic conditions.
Bank Governor Andrew Bailey emphasised a cautious approach, stating the bank would maintain vigilant monitoring of both domestic and global economic developments. The rate reduction brings borrowing costs to their lowest level since June 2023, following a notable decline in inflation from its 11% peak in late 2022.
Market analysts had largely anticipated this move, with financial markets indicating a 97% probability of a rate cut prior to the announcement. The decision was bolstered by December’s unexpected cooling of inflation to 2.5%, down from November’s 2.6%.
The economic outlook presents significant challenges, with the Bank warning of a potential surge in inflation to 3.7% by autumn 2025, nearly double the government’s 2% target. This projection suggests the UK may be entering a period of stagflation, characterised by weak economic growth coupled with elevated inflation levels.
GDP figures paint a concerning picture, with estimates indicating a 0.1% contraction in the final quarter of 2024, and only minimal growth projected for the first quarter of 2025. The Bank attributes the anticipated inflation spike to rising energy prices following a harsh European winter.
External pressures continue to mount, with growing concerns over potential trade disruptions from Donald Trump’s proposed tariff policies. The Bank has specifically highlighted the risks of increased global protectionism, warning of negative impacts on worldwide economic activity and potential trade fragmentation.
Labour’s economic strategy faces additional scrutiny, with industry groups expressing concern over planned increases in employers’ national insurance contributions and minimum wage hikes. These policy changes could potentially force businesses to reduce workforce numbers or increase prices, further complicating the economic landscape.
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