The Bank of England Lowers Interest Rates: What It Means for Inflation and Growth

Bank Rate Reduction: A Modest Cut in Borrowing Costs

The Bank of England’s Monetary Policy Committee (MPC) has taken a cautious approach by reducing the Bank Rate by 0.25 percentage points to 4.5%. This decision was backed by a majority of 7–2, while two members advocated for an even larger cut of 0.5 percentage points to 4.25%.

This move comes amidst concerns about economic growth, inflation, and financial stability. While lower interest rates typically reduce borrowing costs and support investment, the MPC remains focused on balancing inflationary risks.

Inflation Outlook: A Complex Path Ahead

Despite a general trend of disinflation over the past two years, inflation remains a key concern:

• CPI inflation stood at 2.5% in Q4 2024, slightly above the Bank of England’s target.
• By Q3 2025, inflation is expected to rise sharply to 3.7% due to global energy price increases and regulatory changes.
• Underlying domestic inflationary pressures are predicted to ease, with CPI inflation expected to return to around 2% thereafter.

These projections suggest that inflationary fluctuations may continue, but a long-term stabilization remains the MPC’s goal.

Economic Growth: A Slow Path to Recovery

GDP growth has been weaker than anticipated, with declining business and consumer confidence. However, forecasts suggest potential improvement:

• GDP growth is expected to pick up from mid-2025.
• The labor market is easing, indicating a more balanced supply and demand for workers.
• Despite these trends, productivity growth has remained lower than previous estimates.

While economic momentum has slowed, the reduction in interest rates aims to provide much-needed support for businesses and households.

Monetary Policy Stance: A Cautious Approach

The MPC is proceeding with a gradual withdrawal of monetary policy restraint. Their cautious stance is influenced by ongoing concerns about inflation, economic slowdown, and structural market conditions.

• The committee remains committed to keeping the Bank Rate in restrictive territory to maintain inflation control.
• The priority is to balance inflationary pressures while supporting economic recovery.

This measured approach indicates that the MPC seeks to assess economic data continuously before making further adjustments.

Other Considerations: Monitoring Economic Slack

Despite weakening demand, the economy has shown only a small margin of slack. However, supply capacity growth has been sluggish, raising concerns about future economic resilience. The MPC will continue to monitor:

• Signs of persistent inflationary pressures that could impact long-term stability.
• The relationship between demand slowdown and inflation trends.
• Productivity improvements and their role in supporting economic expansion.

The Bank of England remains committed to dynamic policy decisions in response to an evolving economic landscape.