The Bank of England has cut UK interest rates to 4.5%, marking a key shift in monetary policy as policymakers attempt to support economic growth amid a worsening economic outlook. The Monetary Policy Committee (MPC) voted for a quarter-point reduction on Thursday, following similar cuts in August and November last year.
While the rate cut is expected to ease borrowing costs for households and businesses, the Bank has also downgraded its short-term growth forecast, painting a more challenging economic picture for the coming year.
A welcome but cautious cut
Governor Andrew Bailey said the decision to lower the base rate would be “welcome news to many” but warned that global and domestic risks remain high.
“We are monitoring the UK economy and global developments very closely, and taking a gradual and careful approach to reducing rates further,” he said.
The base rate, which influences everything from mortgage and loan costs to savings account interest rates, has now reached its lowest level since June 2023.
Weaker growth outlook
Despite the rate cut, the Bank sharply downgraded its economic growth forecast for the UK this year, cutting it from 1.5% to 0.75%. This is a significant blow for Chancellor Rachel Reeves, whose government has made economic growth a key priority.
In response, Ms Reeves welcomed the interest rate cut but expressed dissatisfaction with the sluggish growth rate.
“Our promise in our Plan for Change is to go further and faster to kick-start economic growth and put more money in working people’s pockets,” she said.
The Bank’s latest projections suggest economic growth will pick up again in 2026 and 2027, with the growth forecast rising to 1.5% in both years—a 0.25 percentage point increase from previous estimates.
Inflation risks remain
The decision to cut interest rates comes at a time when inflation appears to be rising again, with forecasts suggesting it could reach 3.7% later this summer—higher than previously expected.
The Bank attributed this inflationary pressure to higher energy prices, rising water bills, and increased bus fares.
Despite these challenges, the Bank still expects inflation to fall back to its 2% target by the final quarter of 2027—six months later than it had originally anticipated.
Employment concerns and NICs impact
The Bank also revised its unemployment forecast upwards, predicting that joblessness will peak at 4.75%, compared to its previous estimate of 4.5%.
It warned that the recent rise in National Insurance contributions (NICs) for employers could contribute to higher unemployment, as businesses face increased labour costs.
This concern has already materialised, with major firms—including Sainsbury’s—announcing job cuts in early 2025. The supermarket chain said that some of the layoffs were linked to the NICs increase.
Split decision on rate cut
The MPC’s decision to lower interest rates was not unanimous. While seven out of nine members voted for the 0.25 percentage point cut, two members pushed for a bigger reduction to 4.25%.
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This split highlights the delicate balance the Bank is trying to strike between stimulating growth and controlling inflation.
Global uncertainty: Trump’s trade tariffs not factored in
The Bank also noted that it had not yet factored in potential global economic shifts, particularly the impact of Donald Trump’s proposed trade tariffs if he returns to office.
Policymakers said they were closely watching global developments, but that it remained unclear what the overall landscape for US and other global tariffs would look like.
Impact on borrowers
For mortgage holders, the rate cut brings some relief. According to data from UK Finance, the average borrower on a tracker mortgage will see their monthly payments drop by £28.98.
For those on a standard variable rate (SVR) mortgage, payments will fall by £17.17 per month, provided lenders pass on the base rate reduction in full.
What’s next?
While the rate cut is good news for borrowers, the downgraded growth forecast, rising inflation concerns, and higher unemployment predictions suggest that the UK economy still faces significant challenges.
The Bank of England’s future decisions will depend on how inflation, employment, and global trade conditions evolve in the coming months.
