The Bank of England (BoE) announced its first interest rate cut of 2025 on Thursday, reducing the benchmark rate by 25 basis points to 4.5%. The decision, made amid concerns over sluggish economic growth, saw seven of the nine members of the central bank’s Monetary Policy Committee (MPC) voting in favor, while two members pushed for a more aggressive 50-basis-point reduction. Governor Andrew Bailey signaled that further cuts are likely, stating that the bank will assess the pace and extent of future reductions on a meeting-by-meeting basis.
“We expect to be able to cut bank rate further as the disinflation process continues,” Bailey said in a press briefing, while acknowledging uncertainties in the economic landscape. The decision was widely anticipated following recent weak economic data. The U.K. economy stagnated in the third quarter of 2024, according to figures released in December, and grew by just 0.1% in November after contracting in October. Weak retail sales added to expectations of monetary easing. Alongside the rate cut, the BoE sharply downgraded its 2025 growth forecast, lowering its projection from 1.5% to 0.75%.
Inflation, a key focus of the central bank, declined to 2.5% in December, below expectations, with core inflation easing further. The BoE noted that the inflationary pressures from previous external shocks had subsided, but it maintained that monetary policy should be adjusted “gradually and carefully” to ensure price stability. The bank’s target inflation rate remains at 2%. The BoE’s policy move comes as global economic uncertainties persist.
The MPC must balance the need to support growth with the risks posed by potential trade disruptions, particularly as former U.S. President Donald Trump has threatened tariffs on key trading partners, including the European Union and the U.K. The committee stated it would closely monitor inflation risks and economic conditions to determine further policy adjustments. Chancellor Rachel Reeves welcomed the rate cut but emphasized that economic growth remains a priority.
She reiterated the government’s commitment to accelerating infrastructure development and reducing regulatory barriers to stimulate investment and employment. Reeves defended fiscal measures introduced last year, which included tax increases on businesses, asserting that they were necessary to ensure stability. Economists are now analyzing the likely trajectory of interest rates through 2025. Some predict that the BoE will maintain a steady pace of quarterly cuts, with the next reduction expected in May. Others suggest policymakers may act sooner, depending on economic data and external risks.
While inflation is projected to rise slightly in the short term, analysts at Capital Economics anticipate it will fall below 2% in 2026, potentially allowing rates to decline to 3.5% by early that year. The BoE’s cautious approach reflects the broader challenges facing the U.K. economy, as policymakers navigate weak domestic momentum, global trade uncertainties, and the need to maintain inflation control while fostering growth. – By MENA Newswire News Desk.