The Bank of England has implemented its third consecutive interest rate cut, reducing the base rate to 4.5% as concerns about stagflation grow. The decision was not unanimous: two of the nine Monetary Policy Committee members supported a larger 0.50% reduction, creating a notable split within the committee.
Alongside the rate decision, the Bank published substantially revised economic forecasts. Growth expectations for 2024 were sharply lowered to 0.75%, while inflation projections were revised upward to 3.7%, driven in part by higher energy costs. These changes paint a tougher short-term outlook for the UK economy, which recorded a 0.1% contraction in the fourth quarter of 2023 and is now forecast to expand by just 0.1% in the first quarter of 2025.
The revised outlook and policy move pose a difficult challenge for Chancellor Rachel Reeves as she navigates fiscal policy against a backdrop of weak growth and persistent inflationary pressure. A softer growth trajectory combined with elevated inflation raises the risk that households and businesses will face a prolonged period of squeezed real incomes.
Financial markets reacted quickly to the announcement. The pound fell around 1.2% to $1.2361, and traders increased expectations for additional easing, pricing in the possibility of three further rate cuts over the coming months. The Bank, however, stressed that any future reductions in interest rates would follow a “gradual and careful approach,” signaling caution in balancing the trade-offs between supporting growth and bringing inflation back toward target.
Policy-makers will be monitoring several key indicators in the near term: the path of energy prices, wage growth, consumer spending, and how global economic conditions evolve. These variables will influence whether the Bank maintains its newly adjusted projections or revises them again as further data becomes available.