The Bank of England (BOE) has reduced its benchmark interest rate by 25 basis points, bringing it down to 4.5%. This decision, announced after a meeting on December 18, aligns with widespread expectations among economists who anticipated a rate cut following disappointing economic growth data. The central bank's aim is to navigate the United Kingdom through a challenging economic landscape marked by sluggish domestic activity and global trade tensions.
The BOE's move comes after the announcement that Britain's inflation rate dropped to an unexpected low of 2.5% in December, below the central bank's target of 2%. Despite this favorable development in inflation, the U.K. economy has shown signs of stagnation. Data released in December indicated that the economy flatlined during the third quarter, and the latest monthly GDP report showed a mere 0.1% expansion in November, following a 0.1% contraction in October.
Economic conditions have been further strained by declining employment figures. At the December meeting, BOE policymakers determined that the labor market remains broadly balanced; however, payroll data for December revealed additional job losses. This context presents a complex challenge for Chancellor Rachel Reeves and the Treasury, which faces increasing pressure from weak retail data and plans to raise the tax burden on British businesses.
"not coming back with more borrowing or more taxes" – Reeves
The decision to cut rates reflects policymakers' concern about the U.K. economy being "caught between trade wars and weak domestic momentum," as noted by economist Kallum Pickering. The global economic outlook remains uncertain due to potential U.S. tariffs on EU and U.K. imports, proposed by President Donald Trump. This development poses an inflationary risk that the BOE's monetary policy committee must weigh against the need to stimulate growth.
"caught between trade wars and weak domestic momentum" – Kallum Pickering
Economist Ashley Webb commented on the delicate balance faced by the BOE:
"Despite the recent weak news on activity and the uncertainty around the global outlook due to Trump's US import tariffs, the stronger news on domestic price pressures means the Bank of England will probably continue to cut interest rates only gradually" – Ashley Webb
The BOE's decision marks its first rate adjustment of the year, following several challenging months for Chancellor Reeves. Weak retail performance and lackluster growth figures have heightened expectations for monetary easing, as policymakers strive to support the economy without exacerbating inflationary pressures from potential trade conflicts.
Andrew Wishart emphasized the urgency of the situation:
"Until now, the BOE has cut at alternate meetings, but a stagnating economy and declining employment argue for more urgent action" – Andrew Wishart
Looking ahead, Kallum Pickering suggested that further rate cuts may be imminent if economic conditions do not improve:
"However, risks are skewed towards policymakers signalling a willingness to react more forcefully to economic weakness – thus hinting at another cut as soon as the 20 March meeting already" – Kallum Pickering