The Bank of England unexpectedly reduced its key interest rate to 4.5% amid economic uncertainty and downgraded growth forecasts, reflecting concerns over global trade tensions. The growth projection for the UK in 2025 was halved to 0.75%, while inflation has slowed to 2.5%. Despite this, rising energy costs may lead to renewed inflation. The central bank remains cautious, with the possibility of further rate cuts, as businesses hesitate to invest due to unclear trade policies.
Bank of England Lowers Interest Rates Amid Economic Uncertainty
The Bank of England (BoE) made headlines on Thursday by unexpectedly reducing its key interest rate to 4.5%. This decision was accompanied by a notable downgrade in its growth forecasts, highlighting the ongoing struggles of the British economy, which is further threatened by the implications of American tariffs.
Andrew Bailey, the governor of the BoE, addressed the situation in a statement linked to the monetary policy report, stating, “We are closely monitoring the British economy and developments around the world and will take a gradual and cautious approach to further rate cuts.” This marks the third quarter-point reduction in just six months, following similar cuts in August and November.
Revised Growth Projections and Trade Concerns
The monetary authority has halved its growth forecast for the UK in 2025 to 0.75%, down from a previous estimate of 1.5%. This adjustment reflects growing concerns over global economic uncertainties, particularly related to trade tensions initiated by recent tariff threats. While the forecast for 2024 has been adjusted less drastically—from 1% to 0.75%—it stands in contrast to the IMF’s more optimistic outlook, which recently raised its growth projection for the UK to 1.6% for this year.
The BoE has noted that “uncertainty about trade policy worldwide has significantly increased,” particularly since the US presidential election and the subsequent trade conflicts with China. Although the UK isn’t currently facing direct tariff threats, the institution warns that potential increases could negatively impact British economic activity. Businesses may postpone investment and hiring decisions until they gain a clearer understanding of the landscape.
Additionally, analysts at BNY have indicated that potential US tax hikes on EU exports could indirectly weaken the British economy, affecting growth across Europe and Ireland.
Following the BoE’s rate cut, the UK has experienced a slowdown in inflation, which stood at 2.5% year-on-year in December, down from a peak of around 11% at the end of 2022. Despite this progress, the central bank anticipates inflation may rise again, driven by increasing energy costs.
In light of these developments, the British pound saw a decline of approximately 0.76%, dropping to 1.2410 dollars per pound shortly after the announcement.
Mr. Bailey expressed his support for the government’s growth initiatives, acknowledging that “structural policies take time to materialize” and estimating a timeline of two to three years for their impact to be felt. Meanwhile, Finance Minister Rachel Reeves emphasized the importance of investing in essential infrastructure and eliminating unnecessary regulatory obstacles to foster growth.
As the economic landscape continues to evolve, the BoE remains vigilant, with analysts suggesting that the central bank may consider more significant and rapid rate cuts in the future.