Bank of England Cuts Interest Rates Amid Sluggish Growth

The Bank of England (BoE) lowered interest rates by 0.25 percentage points on Thursday, bringing the benchmark rate to 4.5%, in response to sluggish economic growth. However, the central bank sharply revised its inflation forecasts upward while halving its growth projections for the year.

Dissent Over Rate Cut Size

While the quarter-point reduction aligned with economist expectations, two external policymakers, Catherine Mann and Swati Dhingra, pushed for a larger cut to 4.25%—a surprising stance, particularly for Mann, who has historically resisted rate cuts. Governor Andrew Bailey signaled a more cautious approach moving forward, stating the BoE would “monitor the U.K. economy and global developments very closely” and reduce rates at a gradual and careful pace—a slight shift from previous guidance.

Economic Headwinds and Growth Revisions

The British economy has struggled since mid-2024, weighed down by Finance Minister Rachel Reeves’ tax hikes, the looming risk of a global trade war under U.S. President Donald Trump, and rising costs. The BoE estimated that GDP contracted by 0.1% in Q4 2024, underscoring the fragile recovery. Thursday’s cut marks only the third rate reduction since August, leaving U.K. interest rates among the highest in advanced economies, just above the U.S. Federal Reserve’s 4.25%-4.5% range. Economists polled by Reuters previously expected four quarter-point cuts in 2025, bringing rates down to 3.75%, but markets now anticipate a more modest decline to 4%.

Inflation Outlook: Higher for Longer

Inflation, currently at 2.5%, is now expected to peak at 3.7% in Q3 2025, driven by higher energy prices and increases in regulated costs like water bills and bus fares. This is a sharp jump from the BoE’s previous 2.8% peak estimate. The central bank delayed its forecast for inflation to return to the 2% target until late 2027, six months later than previously expected.

Sluggish Growth and Policy Uncertainty

The BoE slashed its 2025 growth forecast to 0.75%, citing weak business investment and poor productivity. Projections for 2026 and 2027 saw slight upgrades to 1.5% from 1.25%, but the overall outlook remains bleak. Uncertainty also looms over potential U.S. tariffs, with the BoE warning that higher global trade barriers could slow U.K. growth, even if Britain is not directly targeted.