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The Bank of England has halved its 2025 growth forecast and cut interest rates by a quarter-point to 4.5 per cent, as it contends with a stagnant UK economy and an increasingly uncertain international environment.
In a blow to UK chancellor Rachel Reeves, the BoE said it now expected the economy to grow by 0.75 per cent this year, half its November forecast of 1.5 per cent, and for inflation to rise before falling back.
The forecasts, which will stoke fears of stagflation, came as all nine members of the Monetary Policy Committee voted to cut benchmark rates from their previous 4.75 per cent.
A majority of seven favoured a quarter-point move, while two backed a jumbo half-point reduction, including Catherine Mann, previously a leading hawk.
“We now expect GDP growth to be notably weaker in the near term before picking up from the middle of the year,” said BoE governor Andrew Bailey.
The prospect of lower rates took the FTSE 100 to a record intraday high and buoyed the bond market, but pushed down the pound.
Neil Birrell, chief investment officer at Premier Miton Investors, said the rate cut was intended “to give the economy a boost” that was “much needed”.
He added that the votes for a half-point reduction clearly showed concern over the UK’s “parlous state of economic growth”.
The BoE estimated that GDP fell by 0.1 per cent in the final quarter of 2024, although it forecast a pick-up in growth to 1.5 per cent for both 2026 and 2027.
Swaps markets expect two further rate cuts this year, with a 60 per cent chance of a third. Before the decision, that probability stood at roughly 35 per cent.
But the central bank said it would take a “careful” approach to further rate reductions, suggesting that market expectations of a quarterly procession of cuts were overdone.
It said Reeves’ decision to increase employers’ national insurance contributions would hit both jobs and prices more than expected, with the unemployment rate rising to 4.8 per cent over the next year, 0.5 points higher than its previous forecast.
“We certainly have a deteriorating growth outlook, but alongside stubborn inflation,” said Nick Hayes, head of fixed income allocation at Axa Investment Managers. “The good news for the bond market is that the most hawkish member has become the most dovish.”
Two-year gilts rallied, with yields, which reflect interest rate expectations and move inversely to prices, down 0.04 percentage points to 4.11 per cent in early-afternoon trading.
The pound was down 1 per cent on the day against the dollar at $1.238.
The FTSE 100, many of whose members record revenues in dollars, was up as much as 1.6 per cent. Housebuilders and construction shares also rose.
Reeves welcomed the rate cut, saying it would help ease cost of living pressures for families and make it easier for businesses to borrow to grow.
But she added: “I am still not satisfied with the growth rate.”
The opposition Conservative party said Reeves’ “mismanagement” of the economy would limit scope for future cuts.
The BoE forecast that inflation would rise to 3.7 per cent in the third quarter of this year, primarily because of higher energy prices, before slipping back to around 2.5 per cent during 2026 and the target of 2 per cent in 2027.
Bailey said the BoE expected “to be able to cut bank rate further as the disinflation process continues”. But he acknowledged there was now “more uncertainty” about how fast inflation would fall.
The bank also noted “an increase in economic uncertainty globally and a pick-up in financial market volatility”, according to the minutes of this week’s meeting. It added that it was “monitoring closely” the tariff plans of Donald Trump’s new administration.
The US president has hinted the UK may be spared duties he is planning to impose on trading partners such as the EU, Canada and Mexico.
Bailey said that if Trump’s tariffs contributed to a “fragmentation” of the global economy, it would be negative for growth but that the implications for inflation were far harder to untangle, since it was not known how countries would respond.
He added that the BoE had not included the impact of tariffs in its inflation forecasts “because we just don’t know what’s going to happen”.
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