The Bank of England has cut interest rates for the third time since the inflation crisis, taking the base rate to 4.5 per cent. The Monetary Policy Committee voted by seven to two to further reduce rates by 0.25 percentage points – a move that was widely expected by markets, but had been put into doubt after government borrowing costs surged in January and President Donald Trump announced his plans for substantial tariffs last week.
Even so, the MPC pushed ahead – interestingly with no one on the committee voting to hold rates at 4.75 per cent (two members voted instead for a 0.5 percentage point cut). It’s clear from the Bank’s report that the MPC is increasingly focused on how higher rates have taken their toll on economic growth, noting that ‘GDP growth has been weaker than expected at the time of the November Monetary Policy Report, and indicators of business and consumer confidence have declined’. Today the Bank revised its growth forecasts down substantially for 2025 Q1, from 1.4 per cent on the year to just 0.4 per cent. It’s not until 2027 that growth forecasts are revised up, just marginally, with no year in this Parliament forecast to pass 1.8 per cent in growth.
This helps explain why Threadneedle Street is leaning in favour of rate cuts, despite inflation now expected to peak at 3.7 per cent this year (a notable uplift in its forecast, due to rising energy prices). The MPC is calling it a ‘bumpy path’ – acknowledging that their target of 2 per cent is not going to be met again for some time. But growth has clearly been compromised to keep inflation under control. The Bank’s job is, of course, to deal with the latter, but their rate-setting abilities affect the whole economy and have no doubt played a role in the stagnant growth figures that land month on month. At some point, that balance had to be addressed, which the Bank is doing with slow and steady rate cuts. And with the labour market broadly in balance, according to the MPC, some of their immediate concerns around secondary inflation effects (like wages outpacing prices), have softened, allowing for the Bank to further reduce rates while still maintaining a relatively hawkish stance.
Many will say that today’s rate cut is good news for the Chancellor, who is on a mission to kickstart economic growth wherever she can. Rate cuts are certainly a part of that process: a reduction in the base rate allows the economy to heat up a bit more, and is a good signal for business that conditions are improving. But reading the MPC’s report, it is very hard to piece together a ‘good news’ narrative – at least not one for the foreseeable future. Growth forecasts are down, again. Productivity estimates are much lower than those in February and November last year – 1.75 per cent and 1.25 per cent lower, respectively.
And while the Bank expects potential productivity growth ‘to recover somewhat over the forecast’, it also notes the ‘considerable uncertainty around this.’ Labour’s first Budget is also under the microscope. It’s not just the slow process of rate cuts, but ‘companies’ potential response to the Budget’ that the MPC says ‘weigh down on consumer sentiment’. Its data-gathering efforts also found that ‘more contacts mentioned the Budget as a deterrent to investment’ in this cycle than the previous one. Rising inflation, especially around food prices, is also pegged to the measures announced by Labour in their first fiscal statement.
Labour needed this rate cut today, as part of a strategy to improve economic growth. But the outlook remains stagnant and dreary. And no small rate cut is going to fix the myriad of broken institutions holding Britain back.
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