The Bank of England (BoE) has cut interest rates by a quarter of a percentage point to 4.5%, as policymakers attempt to counteract a slowing economy. However, concerns over inflation and global economic uncertainty mean further cuts will be approached with caution.
Thursday’s decision aligns with market expectations but revealed a surprising split within the central bank’s Monetary Policy Committee (MPC). Catherine Mann, previously one of the most hawkish policymakers, joined Swati Dhingra in pushing for a more aggressive rate cut to 4.25%. Governor Andrew Bailey acknowledged the potential for further cuts but emphasized a measured approach, stating, “We will have to judge meeting by meeting, how far and how fast.”
The decision to lower rates comes as Britain’s economic growth outlook weakens. The BoE halved its 2025 growth forecast to just 0.75%, citing sluggish productivity and weak consumer and business sentiment. The move is a setback for Chancellor Rachel Reeves, who has been pushing to accelerate economic recovery.
Inflation remains a key concern for policymakers. The central bank now expects inflation to peak at 3.7% in the third quarter of 2025—significantly above its previous forecast of 2.8%—due to rising energy prices and increases in regulated costs such as water bills and transport fares. Inflation is not projected to return to the BoE’s 2% target until the end of 2027, six months later than previously anticipated.
Financial markets initially reacted by pricing in the potential for faster rate cuts, causing the British pound to weaken by as much as 1% against the U.S. dollar before recovering. However, analysts have warned against overinterpreting the dovish vote split within the MPC. Nikesh Sawjani, senior UK economist at Lloyds Bank, noted that while some members advocated for a larger cut, other aspects of the BoE’s communication remain cautious.
Global and Domestic Pressures Weigh on the Economy
Britain’s economic slowdown is compounded by concerns over global trade tensions and domestic uncertainty following the Labour Party’s recent victory in the general election. Businesses remain wary of potential policy shifts, while fears of a U.S.-led trade war under President Donald Trump’s administration could further impact the UK’s economic outlook.
The BoE acknowledged that higher global tariffs could weigh on growth but said it was uncertain how such policies would impact inflation in the UK. Governor Bailey also cited geopolitical uncertainty as a reason for adding the word “careful” to the central bank’s guidance on future rate cuts, reinforcing a gradual approach.
Despite Thursday’s cut being only the third reduction since the BoE began lowering rates from a 14-year high in August, Britain’s interest rates remain among the highest in advanced economies. Some policymakers argued for caution in cutting rates too quickly, warning that weak productivity could keep inflation elevated. Others advocated for a more proactive approach, suggesting that a larger cut could help address weak demand and ensure financial conditions support the UK’s economy.
The BoE’s updated forecasts project economic growth improving slightly in 2026 and 2027, with an expected expansion of 1.5% compared to a previous forecast of 1.25%. However, these projections assume a slower pace of rate reductions than anticipated in November, with interest rates expected to reach 4.25% this year, compared to the 3.75% previously predicted.
While the central bank’s latest projections suggest room for only one more quarter-point rate cut in 2025, Governor Bailey emphasized that the MPC will base its decisions on evolving economic conditions rather than rigid forecasts. The next steps in the BoE’s monetary policy will depend on how inflation, employment, and global economic factors develop in the coming months.