The Bank of England has significantly reduced its growth forecast for the British economy this year, following a third interest rate cut in six months. In its announcement, the bank’s nine-member Monetary Policy Committee lowered the main interest rate by 0.25 percentage points to 4.50%, marking its lowest level since mid-2023. This rate cut was largely anticipated by financial markets.
However, what came as a surprise was the sharp downward revision of the economic growth projection. The Bank of England now expects the economy to grow by just 0.75% in 2025, down from its previous forecast of 1.5% made only three months ago. This revised outlook, if accurate, will be disappointing for the newly elected Labour government, which has prioritized economic growth as a means of improving living standards and funding public services. With growth proving elusive, the government’s popularity has dwindled since its victory in the recent election.
Treasury chief Rachel Reeves, who received criticism for increasing business taxes in her first budget last October, expressed her approval of the recent interest rate cut. However, she emphasized that she was still dissatisfied with the growth rate and vowed that the government would take more aggressive measures to stimulate economic growth.
The government is likely hoping that the central bank will continue to cut interest rates in the coming months, as this could help lower mortgage rates and make loans more affordable, although it would also decrease returns for savers. Financial markets remain uncertain about how many additional rate cuts might happen this year, as the bank is also predicting higher-than-expected inflation in the coming months.
Bank of England Governor Andrew Bailey was cautious in providing guidance, stating, “We’ll be monitoring the U.K. economy and global developments very closely and taking a gradual and careful approach to further rate reductions.” He also emphasized that maintaining low and stable inflation is crucial for a healthy economy, and it is the Bank’s responsibility to ensure that.
The recent interest rate cut signals concern about the British economy’s outlook, which has seen minimal growth in the last six months. This concern is further highlighted by the fact that two out of the nine members of the rate-setting panel voted for a more significant reduction of half a percentage point, bringing the rate to 4.25%.
Luke Bartholomew, the deputy chief economist at abrdn, noted that the votes for a larger cut reflect the worry among some policymakers about the economic challenges facing growth. While the panel’s main goal is to ensure inflation, measured by the consumer price index, reaches a 2% target over the next few years, lower economic growth can help control inflation by signaling weaker demand in the economy.
Currently, inflation stands at 2.5%, and though it’s expected to rise in the coming months—partly due to business tax increases from the new Labour government—most economists anticipate that inflation will eventually decrease toward the target. This outlook allowed the panel to proceed with the rate cut on Thursday.
Inflation has significantly decreased from the high levels seen a few years ago, partly due to central banks raising borrowing costs from nearly zero during the coronavirus pandemic. Prices surged initially because of supply chain disruptions, and later, Russia’s invasion of Ukraine caused energy prices to spike.
As inflation rates have fallen from their multidecade peaks, central banks, including the U.S. Federal Reserve, have begun lowering interest rates. However, most economists do not expect rates to return to the exceptionally low levels seen in the years following the 2008-2009 global financial crisis or during the pandemic.
