BoE cuts rates, predicts weak growth and rising prices
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The news: The Bank of England (BoE) cut its benchmark interest rate by 25 basis points to 4.5%, the lowest in 19 months and the third cut since August.
The context: The cut came amid weak economic growth forecasts and despite the central bank’s expectations that inflation, which is currently above target, will rise further later this year, an event governor Andrew Bailey attributed to temporary factors.
He said the bank’s forecast did not take account of potential global tariffs as it was unclear what form trade policies would take. But he warned a trade war could depress UK growth by “delaying investment spending and hiring decisions.”
The numbers: The 25-basis-point cut was widely expected, but two policymakers—Swati Dhingra and Catherine Mann—pushed for a sharper 50-basis-point reduction. The bank said the two had different views on the outlook. “For one member, a more activist approach at this meeting would give a clearer signal of financial conditions appropriate for the United Kingdom,” the BoE said in a statement.
Inflation is forecast to peak at 3.7% later this year due to rising energy and regulated prices.
The BoE said the economy likely contracted 0.1% in the December quarter, which included Chancellor Rachel Reeves’ tax-raising budget on 30 Oct, and will grow just 0.1% in the first quarter of 2025.
Growth expectations were halved for the year, with the economy projected to expand by just 0.75% in 2025, before growth returns to 1.5% in 2026 and 2027.
The bank warned business sentiment continued to be weak, impacted by tax increases and economic uncertainty.
The pound dropped as much as 1.2% against the dollar following the decision. Traders now anticipate three more 25-basis-point rate cuts in 2025, though the BoE’s forecasts suggest only two further reductions are needed to bring inflation back to target.
What they said: “It will be welcome news to many that we have been able to cut interest rates again,” Bailey said in a statement. “We’ll be monitoring the UK economy and global developments very closely and taking a gradual and careful approach to reducing rates further.”
Asked at the press conference about the possibility of stagflation, Bailey said “I don’t use the word stagflation,” as, he said, it doesn’t have a “precise meaning.” He added the UK was going through a disinflation process.
Neil Birrell, CIO at Premier Miton Investors said: "With growth under threat and inflation remaining higher than hoped, that provides a combination that is likely to see the word 'stagflation' being banded around."
Matthew Landon, a macro strategist at JPMorgan called the decision a “green light” for lower terminal rates.
“Today’s cut from the Bank of England was broadly expected, though the accompanying statement contained some mixed signals,” he said. “At the margin, we interpret this is a green light for the market to price a lower terminal rate.”
The sources: Bank of England, Bloomberg, Reuters
