The Bank of England made its first interest rate cut of 2025 on Thursday, resuming monetary easing amid ongoing concerns over sluggish growth in the British economy.
The widely expected move saw the central bank lower its benchmark interest rate by 25 basis points to 4.5%, marking the third cut in the current cycle following reductions in August and November last year.
The Monetary Policy Committee voted 7-2 in favor of the cut, with two members advocating for a more aggressive 50-basis-point reduction.
The decision comes as UK inflation continues to decline, dropping to 2.5% in December, moving closer to the central bank’s 2% target.
In a statement, the bank said,
There has been substantial progress on disinflation over the past two years, as previous external shocks have receded, and as the restrictive stance of monetary policy has curbed second-round effects and stabilised longer-term inflation expectations.
That progress has allowed the MPC to withdraw gradually some degree of policy restraint, while maintaining bank rate in restrictive territory so as to continue to squeeze out persistent inflationary pressures.
Bank of England’s decision driven by weak growth, falling inflation
The Bank’s decision follows a series of lackluster economic reports.
The UK economy flatlined in the third quarter of 2024, with monthly GDP data showing a modest 0.1% expansion in November after a 0.1% contraction in October.
Retail sales have also struggled, further reinforcing expectations for a rate cut.
At the same time, inflation has cooled faster than anticipated.
Core inflation, which excludes volatile energy and food prices, has also eased, suggesting that price pressures are subsiding.
This has given policymakers room to adjust rates downward in an effort to support growth.
Andrew Wishart, senior UK economist at Berenberg, suggested that economic stagnation and rising unemployment may force the Bank of England to move more quickly in loosening monetary policy.
He noted that recent payroll data showed further job losses, strengthening the case for lower rates.
“Until now, the Bank of England has cut at alternate meetings, but a stagnating economy and declining employment argue for more urgent action,” Wishart said.
Balancing domestic risks and global uncertainty
While the Bank has resumed rate cuts, its policymakers must also weigh risks stemming from global trade tensions.
US President Donald Trump’s recent tariff announcements on key trading partners, including potential levies on the UK and European Union, have created fresh economic uncertainty.
Kallum Pickering, chief economist at Peel Hunt, said the central bank faces the challenge of balancing weak domestic growth with the potential inflationary impact of tariffs.
He expects the Bank to maintain a cautious stance in signalling future cuts.
“The critical question facing policymakers is whether they will signal that another cut could come as soon as March or that they will stay the course set last year — with rate reductions coming at a pace of one per quarter?” he told CNBC.
While Peel Hunt’s base case is that the Bank will wait until May for another rate reduction, Pickering noted that policymakers could signal a willingness to move faster if economic data continues to deteriorate.
What comes next for interest rates?
The Bank’s next steps will be closely watched by financial markets and the government, particularly as Chancellor Rachel Reeves faces increasing pressure over her fiscal policies.
Reeves has defended her economic plans, arguing that tax hikes on businesses were necessary to stabilize public finances.
However, industry leaders have warned that higher taxes could dampen investment and job creation.
Some analysts believe the Bank will take a measured approach to further rate cuts, given the fiscal stance of the UK government and lingering risks in the global economy.
Ashley Webb, UK economist at Capital Economics, said that while the Bank is expected to continue easing policy, it may not move as aggressively as some investors hope.
He said,
Despite the recent weak news on activity and the uncertainty around the global outlook due to Trump’s US import tariffs, the stronger news on domestic price pressures means the Bank of England will probably continue to cut interest rates only gradually.
He predicted that inflation could briefly rise to 3% later this year before falling below 2% in 2026, allowing the Bank to lower rates to around 3.5% by early 2026.
As the UK grapples with sluggish economic growth and external risks, the pace and scale of future rate cuts will depend on how inflation and employment trends evolve in the coming months.
For now, the central bank has taken its first step toward easing financial conditions, but the road ahead remains uncertain.
The post Bank of England cuts rates to 4.5%, signals monetary easing amid UK economic slowdown appeared first on Invezz
