The Bank of England has lowered interest rates for only the second time since 2020, cutting the base rate by 0.25 percentage points to 4.75%. The decision was made by the Bank’s Monetary Policy Committee (MPC) with an 8-1 vote, stronger than the 7-2 split expected by analysts. Catherine Mann, the lone dissenter, argued for keeping rates unchanged.
The Bank’s governor, Andrew Bailey, emphasized that the reduction is part of a gradual strategy, noting that while the economy is expected to evolve as forecasted, inflation remains a key concern. “We need to make sure inflation stays close to target, so we can’t cut interest rates too quickly or by too much,” Bailey said in a statement.
The decision comes after Finance Minister Rachel Reeves’ recent budget, which includes significant tax hikes, spending increases, and borrowing measures. The Bank of England projected that these measures will boost UK economic growth by around 0.75% next year. However, the impact on long-term growth is expected to be minimal, with little improvement in annual growth rates over the next two or three years.
The Bank also noted that the budget would add upward pressure on inflation. It predicted that inflation would rise by nearly half a percentage point at its peak, delaying the return to the Bank’s 2% target by at least a year. Inflation is now expected to reach 2.5% by the end of 2024 and 2.7% by the end of next year, before gradually returning to the target by 2027.
While the MPC has signaled that further rate cuts are likely, it has also cautioned that these adjustments will be gradual. The Bank’s outlook suggests that, despite some positive economic effects from government spending, inflationary pressures, including higher taxes and wage costs, will weigh on the recovery.
The Bank of England also revised its economic growth forecast for 2025 upward, from 1% to 1.5%, citing stronger government consumption and investment. However, the forecast for 2023 growth was downgraded from 1.25% to 1%, reflecting weaker-than-expected past growth.
Despite these revisions, the Bank acknowledged that it had not updated its outlook to account for the recent rise in market borrowing costs. Had these higher interest rates been factored in, the outlook for both inflation and growth might have been less optimistic.
Looking ahead, the Bank reiterated that monetary policy must remain restrictive for an extended period to ensure inflation returns sustainably to its target.