The Bank of England has reduced interest rates to 4.5%, marking a significant move in response to easing inflationary pressures and a sluggish economy. This decision follows the inflation decline from a peak of over 11% during the latter half of 2022. The Bank's monetary policy committee (MPC) voted by a majority of seven to two to lower the key base rate from 4.75% to 4.5%, reflecting a widely anticipated move as financial markets had previously indicated a 97% probability of a rate cut.
Economic activity in the UK has notably slowed, nearly reaching a standstill, as business confidence dwindled following Chancellor Rachel Reeves's budget announcement in October. Despite the rate reduction, the Bank's capacity to enact further cuts remains constrained due to persistent inflationary pressures. The institution has also halved its growth forecasts for the UK, casting a shadow over the economic outlook.
"It will be welcome news to many that we have been able to cut interest rates again today," said Andrew Bailey, the Bank's governor.
Inflation in the UK unexpectedly cooled to 2.5% in December, declining slightly from 2.6% in November. However, households are expected to face renewed challenges as rising prices, particularly energy and utility bills, exert pressure on family budgets. The Bank cautioned about a potential global trade war, asserting that Britain would not remain unaffected by international trade tensions.
"Greater global protectionism would be likely to have a negative impact on world economic activity in the medium term, and lead to increased trade fragmentation," the Bank noted.
The Bank expects that the gross domestic product (GDP) likely fell by 0.1% in the final quarter of 2024 but predicts a modest increase of 0.1% in the first quarter of the current year. The outlook for 2025 remains bleak, with growth forecasts downgraded from 1.5% to 0.75%. Moreover, inflation is projected to rise again, potentially reaching a new high of 3.7% by autumn.
The Bank's decision arrives amid complex economic dynamics characterized by both domestic and international challenges. Rising energy prices and other utility costs continue to stress household finances, while broader concerns about global economic fragmentation persist. Meanwhile, the UK's economic recovery is hampered by subdued business activity and consumer sentiment.
The committee's decision underscores the balancing act faced by policymakers as they navigate between fostering economic growth and managing inflationary risks. While the interest rate cut offers some relief, it is accompanied by cautionary signals regarding future economic conditions.