The Bank of England has lowered its base interest rate by 0.25 percentage points to 4.5%, marking the third reduction in six months. This decision reflects ongoing concerns about the UK’s economic outlook.
The Monetary Policy Committee’s vote was unanimous, with seven members supporting the 0.25 percentage point cut, while two members advocated for a more substantial 0.5 percentage point reduction.
Recent data indicates a stagnation in the UK’s economic growth, with the economy expanding by just 0.1% in November after contracting in both September and October. Additionally, inflation decreased to 2.5% in December, down from 2.6% in November, though it remains above the Bank’s 2% target.
The Bank has also revised its growth forecast for 2025, lowering it from 1.5% to approximately 1%, citing challenges such as global trade tensions and domestic economic weaknesses.
In response to the rate cut, the FTSE 100 index reached a new intraday high, surpassing 8,730 points, while the British pound weakened against the US dollar, trading at $1.2365.
Rhe Bank of England emphasized that it will continue to monitor economic indicators closely and adjust monetary policy as necessary to achieve its inflation and growth objectives.
Industry Comments:
Commenting on today’s (Thursday) decision by the Bank of England’s Monetary Policy Committee to cut the rate of interest to 4.5%, TUC General Secretary Paul Nowak said:
“This rate cut is badly needed to help lift the economy out of stagnation. The Bank must now keep moving with further cuts to support households and businesses in the months ahead.
“Lower borrowing costs will ease pressures on households, helping families with their weekly budgets and leaving them with more to spend. And it will make it more affordable for businesses to invest and grow.”
Luke Bartholomew, Deputy Chief Economist at abrdn, said:
“The decision to cut rates today was widely anticipated. But the fact that two MPC members voted to deliver a bumper 50bps cut, despite revising up near term inflation forecasts, gives a sense of how concerned some policymakers are about the headwinds to growth. It is hard to see the Bank of England materially stepping up its pace of easing until it sees how the increase in National Insurance is digested by the economy in the spring. However, the Bank’s signals today suggest there is scope for several more rate cuts this year, given the weak growth outlook, and we continue to see rates below 3% over the next two years.”
Nicholas Hyett, Investment Manager at Wealth Club, commented;
“Recent economic data points to a slowdown in the UK economy – GDP came in lower than expected, inflation has fallen and unemployment has ticked up. The outlook is gloomy too, with many companies thought to be considering job cuts before a rise in the living wage and higher national insurance contributions in April.
Against that backdrop the Bank’s decision to cut rates is no surprise and was widely expected. Rate-setters, and the government, will be hoping a 0.25% cut provides the post January pick-me-up the economy needs – though some MPC members voted for a more radical reduction.
However, the real risks in the future are largely unknown. Will Trump’s trade war rock the global economy? Will the UK become a tariff target? How many jobs are at risk from rising labour costs? Will the Chancellor hike taxes again in the spring? With all those unknowable risks out there, this rate cut could be seen as much as a shot in the dark than a shot in the arm.”
James Burgess, Head of Commercial and insolvency expert at Atradius UK, says:
“Today’s interest rate cut to 4.5% brings much-needed relief for businesses and consumers, defying expectations that rates would remain high in line with the Budget. This move sets a positive economic tone for 2025.
“For businesses, the reduction fuels confidence, with potential benefits including increased spending, job creation, and greater access to more affordable borrowing, particularly in the mortgage market.
“However, while this is a win for the economy, global uncertainties and the fallout from Reeves’ controversial growth speech last month underscore the need for strategic financial planning. To remain resilient, businesses should focus on liquidity, diversify supply chains, and secure trade credit insurance to capitalise on emerging opportunities.”
