The United Kingdom's economy is bracing for a challenging period as it grapples with rising taxes on businesses and elevated interest rates. The Bank of England (BoE) has made pivotal monetary adjustments, recently cutting the Bank Rate by 25 basis points to 4.50%. Despite this measure, the nation's unemployment rate is poised to rise, with forecasts suggesting an increase to 4.5% between October and December 2024, up from November's rate of 4.4%.
In an effort to navigate these economic complexities, the BoE Governor has advocated for a 'gradual and careful' approach to easing policy. The central bank's updated forecasts indicate that inflation will climb, with expectations of a 2.8% increase in the first quarter of 2025 and a further rise to 3.0% in the opening quarter of 2026. Meanwhile, GDP growth projections are modest, expected to reach 0.4% in Q1 2025 and 1.5% in Q1 2026.
The Bank of England projects that the Bank Rate will hover around 4.5% in the first quarter of 2025, potentially dropping to 4.2% by the same period in 2026. These figures are part of the BoE's updated quarterly projections, which have adjusted inflation upwards while signaling weaker GDP growth. The forecast suggests that the Bank Rate will remain elevated for a prolonged period.
The looming release of the UK's employment figures tomorrow at 7:00 am GMT adds another layer of anticipation. As the nation waits for these numbers, all eyes are on the January Consumer Price Index (CPI) inflation data, which is anticipated to reveal mounting price pressures across various key measures. The current estimate range for this data is between a high of 2.9% and a low of 2.4%.
The headline year-over-year CPI inflation is projected to increase by 2.8%, up from December's reading of 2.5%. Meanwhile, the core CPI inflation, excluding volatile items such as food and energy, is estimated to have risen by 3.7%, a notable jump from December's 3.2%. Services inflation is also expected to surge by nearly a full percentage point to 5.2%, compared to the previous month's figure of 4.4%.
The impending increase in business taxes scheduled for April compounds these economic challenges, further clouding the UK's economic outlook. The BoE's cautious strategy reflects its attempt to balance these pressures while fostering economic stability.