The Bank of England has lowered interest rates to 4.5% and slashed its 2025 UK growth forecast from 1.5% to 0.75%, signaling a more fragile economic recovery than expected.
Governor Andrew Bailey said that while further rate cuts are possible, the Bank will proceed "gradually and carefully"due to ongoing economic uncertainty and inflation risks.
"We live in an uncertain world, and the road ahead will have bumps on it," Bailey told the BBC, adding that future interest rate decisions will be made "meeting by meeting."
Sluggish Growth and Inflation Concerns
The UK economy has remained flat for nearly a year, with zero growth from July to September 2024. The Bank now expects a 0.1% contraction in the last quarter of 2024, raising concerns about a potential recession.
While 2026 and 2027 growth forecasts have been slightly upgraded to 1.5%, the UK economy remains under pressure from factors including:
- Higher energy and water bills pushing up inflation.
- Potential trade tariffs in the US that could disrupt global trade.
- Tax increases on employers, which could dampen business investment and hiring.
Inflation is now projected to rise to 3.7% later this year and may not return to the Bank's 2% target until late 2027.
Government Response and Business Backlash
Prime Minister Keir Starmer acknowledged the slower growth outlook, saying it "just spurs us on" to pursue major economic reforms. His administration is prioritizing "build baby build" policies focused on infrastructure, planning, and nuclear energy to stimulate growth.
However, Chancellor Rachel Reeves' decision to increase employers' National Insurance contributions from Aprilhas drawn strong criticism from businesses. Many argue that higher employment costs will stifle investment and job creation, further weakening growth prospects.
Bank of England Governor Andrew Bailey admitted that the cost of employment increases is affecting business confidence, stating:
"There's no question that the increase in the cost of employment does have an effect."
Impact on Mortgages and Savings
The rate cut will provide modest relief for mortgage borrowers:
- Tracker mortgage holders will see monthly repayments drop by around £29.
- Standard variable rate (SVR) borrowers may benefit if lenders pass on the cut.
- Fixed-rate mortgage holders won’t see an immediate change but could access lower rates when remortgaging.
For savers, however, the cut means lower interest rates on deposits, reducing returns for those relying on savings income.
With weak growth and persistent inflation, the Bank of England faces a delicate balancing act between stimulating the economy and controlling price increases.
