The Bank of England (BoE) cut its base interest rate by 0.25 percentage points to 4.5% on February 6, 2025, marking the third reduction in six months. This decision, supported by all nine members of the Monetary Policy Committee (MPC), with seven voting for a 0.25% cut and two favoring a larger 0.5% reduction, reflects the central bank’s efforts to balance economic growth concerns with persistent inflationary pressures.
Economic Context
The rate cut comes amid a challenging economic landscape:
- Growth Outlook: The BoE revised its 2025 GDP growth forecast down from 1.5% to 0.75%, indicating concerns about economic performance.
- Inflation Trends: While inflation has decreased to 2.5% in Q4 2024, it is projected to rise to 3.7% in Q3 2025 before returning to the 2% target by the end of 2027.
- Labour Market: Recent data suggests pay pressures are easing, though the job market outlook remains a key focus for the MPC.
Market Reactions and Expectations
The decision triggered various market responses:
- The FTSE 100 surged to a record high, rising 1.1% following the announcement.
- The pound initially weakened but later recovered.
- Markets are pricing in two more base rate cuts in 2025, with a 40% chance of a third.
- Some analysts, like those at Goldman Sachs, project up to six rate cuts before spring 2026.
Implications for Consumers and Businesses
The rate cut is expected to have several effects:
- Borrowing Costs: Lower rates should reduce borrowing costs for businesses and consumers, potentially stimulating economic activity.
- Savings Rates: Major banks have already moved to cut rates for savers.
- Mortgage Market: Variable rate mortgages linked to the BoE base rate will see a 0.25% decrease
Economic Outlook and Concerns
Despite the rate cut, several challenges remain:
- Stagflation Fears: The combination of low growth forecasts and persistent inflation has sparked concerns about potential stagflation.
- Business Pressures: Many firms are more concerned about rising operational costs, particularly due to higher employer national insurance contributions and minimum wage increases.
- Global Uncertainties: Geopolitical tensions and potential trade conflicts continue to pose risks to the UK economy.
As the BoE navigates these complex economic conditions, further rate cuts are anticipated throughout 2025. However, the central bank maintains a cautious approach, balancing the need for economic stimulus with the ongoing fight against inflation. The next monetary policy decision, scheduled for March 20, 2025, will be closely watched for further indications of the BoE’s strategy in addressing these challenges.
