The Bank of England’s (BOE) Monetary Policy Committee (MPC) has reduced interest rates to a 19-month low, lowering its benchmark rate by 25 basis points to 4.5%. This marks the lowest rate since June 2023 and provides relief for many homeowners facing the end of five-year fixed mortgage deals in 2025. The rate cut, however, came with a hawkish tone, as the BOE indicated that only two more rate reductions are needed to bring inflation back to the 2% target.
In a move that disappointed Chancellor of the Exchequer Rachel Reeves, the BOE revised its inflation forecast, warning that inflation would rise “quite sharply” later this year, peaking at 3.7%—up from the previous forecast of 2.8%. The central bank also downgraded its economic growth outlook and the estimated growth capacity of the UK economy, further complicating the nation’s financial landscape.
The MPC’s decision was not unanimous, with seven out of the nine members voting for the 25-basis-point cut. Two external members, Swati Dhingra and Catherine Mann, called for a more aggressive 50-basis-point reduction. Mann’s vote for a cut marked the first time she had taken a more “activist” approach in favor of easing policy.
Despite the reduction in rates, traders appeared focused on the possibility of additional cuts, with money markets now pricing in three more 25-basis-point reductions for the year. This has contributed to a decline in the value of the British pound, which dropped 1.2% against the dollar, hitting $1.2361. Government bond yields, known as gilt yields, also fell across the curve.
Governor Andrew Bailey reassured the public, stating that the BOE’s actions would be “gradual and careful,” noting that uncertainties around economic demand and supply would influence future policy decisions. While the rate cut was welcomed, the MPC’s cautious tone indicated that risks remain, and future adjustments would be made carefully.
The updated forecasts in the BOE’s Monetary Policy Report suggested a more hawkish stance than expected. The central bank now projects just two more rate cuts over the next three years, with policy ultimately settling at 4%. This outlook reflects a higher path of inflation, primarily driven by increased energy, water, and regulated prices, including transportation costs. The BOE also downgraded its growth expectations for 2024, reducing the forecast to just 0.75%, and expects a modest recovery to 1.5% from 2026 onwards. This downgrade is largely attributed to persistently weak productivity and concerns over the impact of government spending, such as Labour’s increase in NHS funding.
The bleak growth outlook presents a challenge for Chancellor Reeves, whose tax-raising budget in late 2023 has faced criticism amid weak business sentiment. The BOE noted that the UK economy contracted by 0.1% in the final quarter of 2023, a period that coincided with the implementation of Reeves’ tax hikes. The outlook for the first quarter of 2025 remains subdued, with a projected growth of just 0.1%.
Despite recent announcements aimed at stimulating growth, such as relaxing regulations and accelerating infrastructure projects, the BOE expressed concerns that persistent weak business sentiment could worsen the economic outlook further. Additionally, a potential trade war could delay investment and hiring decisions, further dampening growth prospects.
