The Bank of England’s latest economic forecast has dealt a fresh blow to Chancellor Rachel Reeves, as it slashed the UK’s growth outlook while cutting interest rates. With the Office for Budget Responsibility (OBR) set to deliver its verdict in March, pressure is mounting on Reeves to navigate an increasingly difficult economic landscape without resorting to tax hikes or spending cuts.
The Bank of England halved its growth forecast for 2024, predicting the economy will expand by just 0.75%, down from its previous estimate of 1.5%. This revised outlook adds to concerns about the UK’s sluggish post-pandemic recovery, despite the decision to cut interest rates to 4.5%.
Bank of England warns growth policies will take time
Governor of the Bank of England, Andrew Bailey, acknowledged Reeves’ recent push for economic growth but warned that structural policies would take time to deliver results.
“Growth rate in the UK has been low since the financial crisis – addressing those questions is critical, so I very strongly agree with the Chancellor.
Structural policies take time to come through,” he said.
With the Chancellor expected to present her spring statement to Parliament in March, the timing of this bleak economic forecast could not be worse. The OBR’s upcoming assessment will be crucial in determining whether Reeves can stick to her “ironclad” fiscal rules—promising economic stability without the need for tax rises or major spending cuts.
Chancellor faces difficult budget decisions
Speaking on Thursday, Reeves admitted she was “still not satisfied with the growth rate”, but insisted her plans would lead to sustainable economic improvements. However, if the OBR’s forecast follows the Bank’s more pessimistic outlook, she may be forced to revise her approach.
In her October Budget, Reeves claimed to have £9.9 billion in fiscal headroom, but that cushion could now be significantly smaller. With a spending review scheduled for later this year, government departments are already expected to find efficiency savings worth 5% of their budgets—a move that could prove even more challenging if economic conditions worsen.
Paul Johnson, director of the Institute for Fiscal Studies (IFS), described the Bank’s update as a “pretty pessimistic forecast”.
Posting on X (formerly Twitter), Johnson noted:
“OBR is generally much more optimistic than the Bank, but if it moves in a similar direction that will spell trouble for the Chancellor.”
Global uncertainty adding to UK economic struggles
Beyond domestic challenges, global economic headwinds could further complicate the UK’s growth prospects. The Bank of England has raised concerns over potential US tariffs, which, even if not directly aimed at Britain, could have a knock-on effect on UK trade and economic growth.
Governor Bailey warned:
“If there were to be tariffs that contributed to a fragmentation of the world economy, that would be negative for growth for the world economy. I hope that doesn’t happen, but that could happen.”
While the direct impact on UK inflation remains “much more ambiguous”, the risk of global economic disruption is another factor Reeves will have to consider when finalising her spring statement.
What happens next?
The Chancellor’s spring statement is expected to be an update to MPs rather than an emergency Budget, as the government has committed to only one major fiscal event per year in the autumn. However, if the OBR confirms a bleaker economic outlook, Reeves may have to adjust her plans to avoid breaching her self-imposed fiscal rules.
As she prepares for this crucial moment, the question remains: can Reeves deliver on her promises of stability and growth, or will economic realities force her into difficult compromises? With pressure mounting from both financial markets and political opponents, the next few months will be a major test of her economic strategy and political resilience.