Bank Of England Cuts UK Interest Rates As Growth Forecast Halves

The Bank of England has downgraded its prediction for economic growth in the UK.

That’s a blow to the Labour government as they have repeatedly promised to grow the economy since getting into office.

The BoE cut its previous prediction of 1.5% growth in November 2024 to 0.75% for right now, meaning the UK is only narrowly avoiding the definition of a formal recession in the coming months.

The Bank traced this move back to the National Insurance rise – part of Rachel Reeves’ autumn Budget – which it said would reduce employment so much that it would outweigh the benefits from greater public investment.

The Bank said the looming threats from the US over possible tariffs pose a further risk too, although that has not yet been included in its forecast.

It warned the chancellor’s latest growth plans in last week’s major announcement – where Reeves confirmed a third runway for Heathrow Airport – would also add nothing to the value of the UK’s GDP (growth domestic product).

But the Bank did also brought the central interest rate down to its lowest level in more than 18 months.

The rate, which guides the cost of borrowing for banks across the country, was dropped from 4.75% to 4.5% on Thursday.

It should lead to cheaper borrowing costs for mortgages and loans – although it will mean lower returns on savings, too.

The decision comes after inflation unexpectedly fell from 2.6% to 2.5% in December – but the Bank today predicted that inflation will “rise quite sharply” in the autumn, getting up to 4%.

With little growth and growing inflation, the UK is dangerously near “stagflation”.

Interest rates are used as a lever by the Bank to keep the inflation rate – a measure of how much costs change over a 12-month period – at their target level of 2%.

If it is significantly higher than 2%, inflation risks pricing the general public out of everyday essentials, sparking a cost of living crisis like the one seen in October 2022, when inflation reached 11%.

If inflation is any lower than 2%, the economy does not grow.

The BoE governor Andrew Bailey said: “It will be welcome news that we have been able to cut interest rates again today. We’ll be monitoring the UK economy and global developments very closely and taking a gradual and careful approach to reducing rates further.

“Low and stable inflation is the foundation of a healthy economy and it’s the Bank of England’s job to ensure that.”

Chancellor Rachel Reeves welcomed the interest rate cut, but said she was “not satisfied” with the growth rate.

She said: “Our promise in our Plan for Change is to go further and faster to kickstart economic growth to put more money in working people’s pockets.

“That’s why we are taking on the blockers to get Britain building again, ripping up unnecessary regulatory barriers and investing in our country to rebuild roads, rail and vital infrastructure.”

Mel Stride, shadow chancellor, said the interest rate change will be “welcome news for many families and businesses who have been hit hard by Labour’s mismanagement”.

He added: “Sadly their disastrous Budget is likely to mean fewer rate cuts this year than previously anticipated.

“Under new Leadership, the Conservatives will back business and our nation of entrepreneurs to create jobs and wealth. That is the only way to grow our economy so everyone can have a more secure future.”

Meanwhile, the Lib Dems’ Daisy Cooper said: “The new growth forecast needs to be a wake up call for the chancellor. 

“Our economy will never see the back of the years of Conservative economic vandalism if she continues to push ahead with her misguided national insurance hike. Reeves must also change course on her baffling refusal to negotiate a bespoke UK-EU Customs Union to turbocharge growth.

“People are still having to choose between heating and eating and being forced to use public services that are completely broken. Without an economy that is thriving none of this will change.

“Rachel Reeves needs to see sense, scrap her national insurance rise, which is hammering small businesses, and jettison her short-sighted red lines on a Customs Union. Only then will we see an end to these putrid growth figures.”

Paul Noble, CEO of Chetwood Bank, welcomed the news of a cut to interest rates, saying the cut “marks a significant milestone for the UK economy”.

“For many, this decision will come as a welcome relief, renewing confidence and optimism for the months ahead,” he said.

But he warned “the economy clearly underperforming and inflationary pressures [are] still at play following the Budget,” meaning it’s difficult to predict what will happen with rates in the future.

Alpa Bhakta, CEO of Butterfield Mortgages Limited, suggested “today’s rate cut should precede more activity as borrowing cost becomes lower”. 

Meanwhile, Paresh Raja, CEO of Market Financial Solutions, said: “Today’s decision was widely expected, and there’s been plenty of evidence of lenders changing their rates over recent weeks ahead of the base rate being cut. But it is another positive step nonetheless, and it will likely bring more buyers into the market.”

He added: “The forecasts still suggest there could be anything between one and three further drops this year, but such predictions are sensitive to other trends, such as the performance of the economy and the rate of inflation.”

However, Danisha Kazi, Head of Economics at Positive Money, said: “Today’s rate cut isn’t enough; to remedy the harm it’s done to investments that will deliver future price stability, like clean energy, the Bank of England should ensure lower rates are passed through to these sectors, through tools such as a green Term Funding Scheme.”