Bank of England cuts rates to boost economy amid gloomy forecasts
- The Bank of England lowered the base interest rate to 4.5% amid concerns over economic growth and rising inflation.
- This represents the third rate cut in six months and reflects a downgrade in the UK's growth forecast for 2025.
- The decision aims to relieve pressure on businesses and households, but concerns remain regarding long-term economic stability.
The Bank of England made a significant monetary policy change on February 6, 2025, announcing a reduction in the base interest rate from 4.75% to 4.5%. This decision comes amidst ongoing economic challenges, with the bank downgrading its growth forecast for the UK economy from 1.5% to just 0.75% for the year. This move marks the third rate cut in the past six months, reflecting increasing concerns about economic stagnation and rising inflation, which is now projected to peak at 3.7% in the summer due to surging energy prices. Policymakers indicated that the recent cuts are intended to provide much-needed support to businesses struggling with increased operational costs, especially related to higher national insurance contributions imposed by the government's fiscal policies. These changes are expected to impact consumer confidence, employment rates, and investment decisions, as businesses adjust to new financial realities amidst fluctuating market conditions. Despite the bearish outlook for 2025, the Bank remains optimistic for the longer-term economic recovery, estimating a growth rate of 1.5% by 2026 and 2027. However, analysts remain divided on the likely efficacy of the interest rate cuts, especially given the anticipated rise in inflation and potential global economic disruptions stemming from trade tariffs, particularly those associated with U.S. politics. Furthermore, the government's plans to stimulate growth through construction and other investments may not yield immediate results, raising concerns about the overall effectiveness of current economic strategies. The immediate response to the interest rate cut was a boost in the FTSE 100 index, signaling investor confidence in the Bank's efforts to foster economic recovery, despite the prevailing uncertainties. This improvement highlights the delicate balance required by the monetary authorities as they navigate the challenges of inflationary pressures, market expectations, and an overall slowing economy.