7:42 am - February 25, 2025
The Bank of England has announced another interest rate cut, reducing borrowing costs by a quarter of a percentage point to 4.5%. This move comes as a welcome relief for households and businesses, as it makes loans and mortgages more affordable. However, the decision also signals that the economy is facing significant challenges. Two members of the Bank’s Monetary Policy Committee (MPC) voted for a larger cut of half a percentage point, indicating that there is growing pressure to provide more stimulus to the economy. This suggests that further rate cuts may be on the horizon in the coming months.
Despite the rate cut, the Bank has painted a gloomy picture of the UK’s economic prospects. It has sharply downgraded its growth forecasts, warning that the economy will only narrowly avoid a formal recession in the coming months. The Bank has also reduced its estimate of the economy’s potential growth rate, which has dropped from 1.5% a year ago to just 0.75% now. This reflects a longer-term slowdown in the UK’s productive capacity and a pessimistic outlook for the future. Additionally, the Bank has criticized the government’s recent growth plans, stating that they will have little to no impact on economic growth over the forecast period. This is a significant blow to the Chancellor, who had hoped to boost the economy through new measures.
Bank of England Governor Andrew Bailey has emphasized the need for caution and gradual action in setting interest rates. He stated, “Low and stable inflation is the foundation of a healthy economy, and it is the Bank of England’s job to ensure that.” Bailey also hinted that the Bank will continue to monitor the economy closely and take a careful approach to further rate cuts. He acknowledged the uncertainty in the global economy and the need to see evidence that disinflation (the slowing of inflation) is on a stable path before making more aggressive moves. This suggests that while the Bank is willing to cut rates further, it is not committed to a specific path and will remain flexible based on incoming data.
Financial markets are already pricing in the expectation of further rate cuts, with investors predicting a total of four cuts this year. This reflects the widespread view that the UK economy is in need of additional support to avoid a deeper slowdown. Bailey, in an interview with Sky News, reiterated that the Bank does not endorse a specific path for interest rates, preferring instead to take a “gradual and careful” approach. He cited two key reasons for this stance: the need to see continued progress in reducing inflation and the high level of uncertainty in the global economy. This cautious approach reflects the Bank’s balancing act between supporting growth and maintaining price stability.
The Bank’s latest Monetary Policy Report and forecasts reveal a bleak outlook for the UK economy over the next few years. The Bank has cut its growth forecasts for this year, next year, and the year after, while raising its inflation forecast. This suggests that the economy is likely to remain weak for an extended period, with limited prospects for a strong recovery. The report also highlights the potential risks to growth from external factors, such as the tariffs threatened by former U.S. President Donald Trump on various economies. While these tariffs have not yet been incorporated into the Bank’s models, they represent a significant risk to global economic stability and could further dampen UK growth in the coming years.
In summary, the Bank of England’s decision to cut interest rates reflects the ongoing challenges facing the UK economy. While the rate cut is a positive step for borrowers, the Bank’s downgraded growth forecasts and cautious approach to future cuts suggest that the economy is in for a difficult period. The government’s growth plans have been deemed ineffective by the Bank, and external risks such as global trade tensions add to the uncertainty. As the Bank navigates this complex environment, it will need to carefully balance its policy decisions to support the economy while maintaining inflation control. For now, households and businesses will need to brace themselves for a period of economic weakness, with the hope that further stimulus measures will help to stabilize the outlook in the years ahead.