The Bank of England's monetary policy committee (MPC) announced a significant decision on Thursday, voting 7-2 to cut interest rates by a quarter point, bringing them down to 4.5%. This move comes amidst a backdrop of challenging economic forecasts, with the Bank anticipating a contraction in economic output of 0.1% in the final quarter of 2024. However, the Bank projects a modest expansion of 0.1% in the current quarter, narrowly avoiding a technical recession.
The Bank of England's latest forecasts paint a complex picture of the UK's economic landscape. While productivity is expected to decline, post-tax incomes are projected to rise by 1.25% in inflation-adjusted terms in 2025. In the near term, post-tax incomes are expected to increase by just 0.25% annually over the next two years. Despite these modest income gains, the specter of inflation looms large, driven by soaring global energy prices. The Bank predicts inflation will reach 3.7% by the end of summer, adding to the strain on household budgets.
Governor Andrew Bailey emphasized that the MPC would adopt a "gradual and careful approach" to further rate reductions. The decision to cut interest rates is perceived as a short-term boost for economic growth, offering some respite amid turbulent times. However, the Bank's forecast suggests a challenging road ahead for the UK economy, characterized by stagnant living standards and persistent high inflation.
The outlook for GDP growth in 2025 has been notably revised downward, halved to 0.75%, significantly lower than the earlier projection of 1.5%. These adjustments underscore the difficulties facing the UK economy, as it grapples with global economic uncertainties and domestic pressures.
The MPC's decision reflects its concerns about the precarious balance between fostering economic growth and managing inflationary pressures. The move aims to provide some immediate support to the economy but highlights the need for cautious monetary policy going forward.