The Bank of England’s decision to cut the base rate to 4.5% was widely expected in the days leading up to the decision. The decision, made by a 7-2 majority, saw the minority of two members looking for the rate to be reduced to 4.25%.
So, does this signal the beginning of a series of cuts throughout 2025? Let’s take a closer look at the key factors at play.
Inflation: a bump in the road?
Inflation, as measured by the Consumer Price Index (CPI), stood at 2.5% for the final quarter of 2024. However, shortly after the Bank’s decision, new data for January 2025 showed an unexpected rise to 3.0%, driven largely by higher transport and food costs.
The Bank had already forecast CPI inflation to rise to 3.7% by autumn 2025, reflecting global energy costs and regulatory price adjustments. Despite this short-term spike, the Bank remains confident that domestic inflationary pressures are easing and expects CPI to return to its 2% by the end of 2025.
Growth: a mixed picture
The Bank anticipates a rebound in GDP growth from mid-year. They the economy’s ability to produce goods and services has expanded at a slower pace than previously estimated.
Despite signs of weaker demand, they believe this has generated only a marginal level of spare capacity within the economy. This perspective has informed their decision to lower the interest rate to 4.5%.
More cuts on the horizon?
Looking ahead, the Bank has signalled that any further rate cuts will be approached with caution, highlighting ongoing uncertainties in both supply and demand.
Additionally, global factors are adding complexity to the outlook. Recent trade policy shifts in the US and retaliatory measures from other nations have increased financial market volatility, making it difficult to predict the knock-on effects for the UK economy.
For now, while further rate cuts are certainly on the table, the Bank’s cautious stance suggests they will proceed carefully. If inflation continues to rise unexpectedly, we may see a slower path to lower rates than initially anticipated.
One thing remains certain and that is uncertainty!