The Bank of England has reduced its main interest rate by a quarter of a percentage point to 4.5%, following an upward revision of inflation forecasts for this year. However, the central bank judged that this increase would likely be temporary. The move aligns with economists’ expectations, as forecasted in a Reuters poll, though it came with some internal dissent.
Two external members of the Monetary Policy Committee (MPC), Catherine Mann and Swati Dhingra, called for a more significant reduction to 4.25%, citing the weaker economic growth. This was a departure from the bank’s previous stance, as Mann had historically been against rate cuts but had acknowledged that a shift to more active policy loosening might be needed at some point.
Bank of England Governor Andrew Bailey emphasized that the institution would continue to monitor the UK economy and global developments closely, maintaining a careful and gradual approach to future rate cuts. This statement marks a shift from December’s language, where Bailey only mentioned a “gradual” approach.
The UK economy has faced considerable challenges since mid-2024, including concerns over tax increases for employers, the possibility of a global trade war led by US President Donald Trump, and rising costs. As a result, economic growth has been sluggish, with the Bank of England forecasting that the economy likely contracted by 0.1% in the fourth quarter of 2024.
The rate cut announced today is only the third since the Bank of England began lowering borrowing costs in August after they reached a 14-year high. Despite this, British interest rates remain among the highest in advanced economies, sitting just above the US Federal Reserve’s range of 4.25% to 4.5%.
In the past, economists had predicted that the Bank of England would cut rates more aggressively in 2025, with some expecting four quarter-point reductions to bring the rate down to 3.75%. However, recent market activity suggests that rate cuts might be more gradual, with rates potentially reaching 4% instead.
Minutes from the meeting revealed mixed opinions among policymakers. Some favored a cautious approach to future rate cuts due to concerns about weak productivity, which could potentially push inflation higher. Others felt that the risk of persistent inflation was lower, but the bank still needed to act carefully.
The outlook for the UK economy has worsened since the last set of forecasts in November. Inflation is expected to peak at around 3.7% in the third quarter of this year, driven by rising energy prices, higher water bills, and bus fares. This is a significant upward revision from previous expectations. The Bank of England now predicts inflation will not return to its 2% target until the final quarter of 2027, six months later than previously forecast.
Meanwhile, the growth forecast for this year has been halved to just 0.75%, with weak business and consumer sentiment cited as major factors. However, the forecast for growth in 2026 and 2027 was revised slightly upward.
The Bank of England acknowledged the potential impact of global factors, such as higher tariffs from the US, which could affect inflation and growth, even if the UK is not directly targeted.
In an internal split, the two policymakers advocating for a larger rate cut viewed weak growth as sufficient to bring inflation back to target in the medium term, despite the risks of higher tariffs. However, the MPC ultimately chose to lower the rate to 4.5%, a decision that will shape economic policy moving forward.