The Bank of England has significantly revised its growth forecast for the British economy, now projecting an increase of only 0.75% for the year, a sharp decline from the previous estimate of 1.5%. This announcement came alongside the bank’s decision to lower its main interest rate by a quarter percentage point to 4.50%, marking the third cut in six months and the lowest level since mid-2023.
The Monetary Policy Committee, comprised of nine members, made this decision in response to ongoing economic challenges. While the interest rate reduction was anticipated by financial markets, the drastic downgrade in growth expectations caught many off guard. The new forecast poses a challenge for the Labour government, which has prioritized economic growth as a means to improve living standards and bolster funding for public services. The government’s popularity has already waned since its election victory in July, and these economic projections are likely to exacerbate concerns about its effectiveness.
Treasury chief Rachel Reeves expressed her disappointment with the current growth rate, despite welcoming the interest rate cut. She emphasized the government’s commitment to accelerating economic growth initiatives. The administration hopes that lower interest rates will lead to reduced mortgage costs and cheaper loans, although this could also result in diminished returns for savers.
The Bank of England’s decision comes amid rising inflation, which is expected to reach 3.7% in the first half of the year, before gradually returning to the target rate of 2%. Governor Andrew Bailey acknowledged the uncertainty surrounding the economic outlook, particularly in light of potential tariff threats from the United States. He indicated that the bank would closely monitor both the domestic economy and global developments as it considers future rate adjustments.
Interestingly, during the recent meeting, two committee members advocated for a more aggressive rate cut of half a percentage point, highlighting the growing concerns among policymakers regarding the headwinds facing the economy. Although the committee’s primary focus is on controlling inflation, the interplay between economic growth and inflation remains a critical factor in their decisions.
As the Bank of England navigates this challenging landscape, the broader economic implications of these decisions will be closely watched, particularly as the government seeks to restore confidence and stimulate growth in a climate of uncertainty.