Bank of England forecasts half of growth and reduces interest rates to 4.5%
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The Bank of England has reduced its 2025 growth estimates and lowered interest rates by a quarter to 4.5% as it is increasingly uncertain with the UK’s stagnant economic and international environment.
Boe said in a blow to British Prime Minister Rachel Reeves that the economy is now expected to grow by 0.75% this year, half of which is expected to be 1.5%, while inflation will increase.
“We now expect GDP growth to be weaker in the near term starting from mid-year and before the next,” said Boe Governor Andrew Bailey.
Thursday’s forecasts will put people in fear of stagnation as all nine members of the Monetary Policy Committee voted to lower the benchmark interest rate from the previous 4.75%.
Most of the seven favored the quarter-point move, while the two supported the giant half-point, including Catherine Mann, who was the leading Hawk before.
Expectations of slowing down speed briefly weakened the pound, over 1% of the dollar, and helped the FTSE 100 reach a record high.
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Neil Birrell, chief investment officer of Miton Investors, said the tax cuts aim to “make the economy promote the economy” and “especially needed”.
He added that the reduction in votes clearly demonstrated concern about the “parassimilar state of economic growth”.
BOE estimates GDP fell 0.1% in the last quarter of 2024, although it forecasts growth to grow to 1.5% in 2026 and 2027.
It said Reeves’ “decision to increase employer’s national insurance contributions will reach employment and prices, while the unemployment rate rose to 4.8% next year, 0.5 points higher than previous forecasts.
Traders in swap markets are now expected to drop further twice this year, with about 40% chances being one third, more likely than before the BOE decision.
The central bank said it would take a “careful” approach to further reduce it, indicating that market expectations were too high on the day of a series of cuts.
Bailey said in a comment to Bloomberg that investors should not “overweight” in the MPC vote, adding that he hopes the bank can further lower interest rates “as the dismissal process continues.”
But he admits there is more uncertainty about the rate of inflation falling now.
In its latest forecast, the bank estimates inflation will rise to 3.7% in the third quarter of this year, mainly due to rising energy prices before falling to its 2% target in 2026.
The pound fell 1.2% against the dollar on the day, then cut its losses to a 0.6% drop in late afternoon to $1.244.
FTSE 100, many of which made revenues in USD, closed up 1.2% on the day.
Prime Minister Sir Keir Starmer welcomes Thursday’s cuts
But conservative Treasury spokesman Mel Stride said the country faces a “breeding” due to government policies – a combination of inflation and weak growth.
According to the meeting minutes, BOE also pointed out “the increase in global economic uncertainty and the increase in financial market volatility.” It added that it is “closely monitoring” Donald Trump’s new administration’s tariff plans.
The U.S. president has hinted that Britain may retain his duties as he intends to impose it on trading partners such as the EU, Canada and Mexico.
Bailey said that if Trump’s tariffs lead to “dispersal” in the global economy, it would be negative for growth, but the impact on inflation is difficult to unravel because there is no idea how the country will react.
He added that the BOE did not include the impact of tariffs in its inflation forecast “because we don’t know what will happen.”
