Bank of England Slashes Interest Rates to 4.5% Amid Economic Growth Concerns

2025-03-01

The Bank of England has cut interest rates to 4.5%, marking the lowest level since June 2023, while simultaneously halving its growth forecast for the UK economy in 2025. The Monetary Policy Committee (MPC) voted 7-2 in favour of the quarter-point reduction, with two members advocating for a larger half-point cut. The decision comes amid concerns over weak economic growth, with the Bank downgrading its 2025 GDP forecast from 1.5% to 0.75%, citing declining household and business confidence following the government’s autumn Budget.

Governor Andrew Bailey warned of a temporary rise in inflation, expected to peak at 3.7% by autumn, nearly double the government’s 2% target. He attributed this to higher energy prices and other utility bills, driven by a cold European winter. Despite this, Bailey indicated that the Bank would take a “gradual and careful approach” to further rate cuts, emphasising the need to balance inflationary pressures with economic stagnation.

The rate cut provides some relief for borrowers, particularly those on tracker mortgages, who will see monthly repayments fall. However, the Bank’s gloomy outlook has raised concerns about stagflation, with weak growth coupled with rising prices. The economy is expected to contract by 0.1% in the final quarter of 2024 and grow by just 0.1% in the first quarter of 2025.

Chancellor Rachel Reeves faced criticism as the Bank’s forecasts highlighted the impact of her Budget measures, including a £25bn increase in employers’ National Insurance contributions and a 6.7% rise in the minimum wage. Business groups warned these policies could lead to job cuts and higher prices. Meanwhile, Prime Minister Keir Starmer welcomed the rate cut, stating it would leave households with “more money in their pockets,” but acknowledged the need for stronger economic growth.

The Bank also flagged risks from global trade tensions, particularly US tariffs, which could further dampen growth. While the rate cut offers short-term relief, the UK’s economic outlook remains uncertain, with inflation not expected to return to target until the end of 2027.