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The Bank of England has halved its 2025 growth estimate and cut interest rates by a quarter-point to 4.5 per cent, as it contends with a stagnant UK economy and an increasingly uncertain international environment.
In a blow to UK chancellor Rachel Reeves, the BoE said it now expected the economy to grow 0.75 per cent this year, half its November forecast of 1.5 per cent, and for inflation to rise before falling back.
“We now expect GDP growth to be notably weaker in the near term before picking up from the middle of the year,” said BoE governor Andrew Bailey.
Thursday’s forecasts, which will stoke fears of stagflation, came as all nine members of the Monetary Policy Committee voted to cut benchmark rates from their previous 4.75 per cent.
A majority of seven favoured a quarter-point move, while two backed a jumbo half-point reduction, including Catherine Mann, previously a leading hawk.
Expectations of faster rate cuts briefly weakened the pound more than 1 per cent against the dollar and helped the FTSE 100 to a record high.
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Neil Birrell, chief investment officer at Premier Miton Investors, said the rate cut was intended “to give the economy a boost” that was “much needed”.
He added that the votes for a half-point reduction clearly showed concern over the UK’s “parlous state of economic growth”.
The BoE estimated that GDP fell 0.1 per cent in the final quarter of 2024, although it forecast a pick-up in growth to 1.5 per cent for both 2026 and 2027.
It said Reeves’ decision to increase employers’ national insurance contributions would hit both jobs and prices more than expected, with the unemployment rate rising to 4.8 per cent over the next year, 0.5 points higher than its previous forecast.
Traders in swaps markets now expect two further rate cuts this year, with a roughly 40 per cent chance of a third — a marginally higher probability than before the BoE decision.
The central bank said it would take a “careful” approach to further rate reductions, suggesting that market expectations earlier in the day of a series of cuts were overdone.
Bailey, who said in comments to Bloomberg that investors should not “put too much weight” on the MPC vote, added that he expected the bank to be able to cut rates further “as the disinflation process continues”.
But he acknowledged there was now “more uncertainty” about how fast inflation would fall.
In its latest forecast, the bank estimated that inflation would rise to 3.7 per cent in the third quarter of this year, primarily because of higher energy prices, before slipping back to around 2.5 per cent during 2026 and the 2 per cent target in 2027.
The pound fell as much as 1.2 per cent against the dollar on the day, before paring its losses to trade 0.6 per cent lower by late afternoon at $1.244.
The FTSE 100, many of whose members record revenues in dollars, closed up 1.2 per cent on the day.
Sir Keir Starmer, prime minister, welcomed Thursday’s cut but said there was “more to do” to boost growth, including building nuclear power stations
But Mel Stride, Conservative treasury spokesman, said the country was facing “Starmflation” — a combination of rising inflation and sluggish growth, due to government policies.
The BoE also noted “an increase in economic uncertainty globally and a pick-up in financial market volatility”, according to the meeting’s minutes. It added that it was “monitoring closely” the tariff plans of Donald Trump’s new administration.
The US president has hinted the UK may be spared duties he is planning to impose on trading partners such as the EU, Canada and Mexico.
Bailey said that if Trump’s tariffs contributed to a “fragmentation” of the global economy, it would be negative for growth but that the implications for inflation were far harder to untangle, since it was not known how countries would respond.
He added that the BoE had not included the impact of tariffs in its inflation forecasts “because we just don’t know what’s going to happen”.
Additional reporting by George Parker
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