The UK central bank of Thursday cut interest rates from 4.75% to 4.5% — the lowest base rate since June 2023.
The Bank of England’s Monetary Policy Committee (MPC) voted 7-2 in favour of the rate cut. Two members of the MPC wanted a bigger rate cut — to 4.25%
The UK central bank also cut its growth forecast for the UK economy in 2025 from 1.5% to 0.75% — and said UK inflation will rise to 3.7% later this year.
REACTION:
Luke Bartholomew, Deputy Chief Economist at Abrdn: “The decision to cut rates today was widely anticipated. But the fact that two MPC members voted to deliver a bumper 50bps cut, despite revising up near term inflation forecasts, gives a sense of how concerned some policymakers are about the headwinds to growth.
“It is hard to see the Bank of England materially stepping up its pace of easing until it sees how the increase in National Insurance is digested by the economy in the spring.
“However, the Bank’s signals today suggest there is scope for several more rate cuts this year, given the weak growth outlook, and we continue to see rates below 3% over the next two years.”
Daniel Mahoney, UK Economist at Handelsbanken: “Expectations were for eight members to back a 0.25pp cut in rates and one to back a hold, but the vote has ended up being far more dovish: seven members argued for a cut of 0.25pp and two members wanted to go further with a 0.5pp drop in rates.
“Catherine Mann was one of the MPC members backing a 0.5pp cut in rates, a sharp pivot away from her previous hawkish stance. In the round, the Committee now agrees that there has been adequate progress on disinflation to warrant a drop in interest rates, although there remains a degree of caution with respect to further moves that ease the restrictiveness of monetary policy.
“They stress that ‘monetary policy will need to remain restrictive for sufficiently long until the risks to inflation returning sustainably to the 2% target in the medium term have dissipated further’ …
“GDP growth in the immediate term has been revised down sharply although projections for 2026 Q1 and 2027 Q1 are relatively similar. The inflation outlook has been revised up, with y-o-y CPI inflation rather alarmingly expected to peak at 3.7% in 2025 Q3 and remain above the Bank of England’s target right through to the end of 2027. These forecasts are based on market expectations for interest rates.
“This highlights the difficult trade-off faced by the Bank of England of risks around future inflation persistence while at the same time near-term growth prospects weakening. The prospect of US tariffs and the possible escalation of trade dislocation adds to the risk of further weakening activity, although the potential impact on future inflation prospects is less clear …
“The more dovish-than-expected vote suggests the balance of opinion on the MPC is now beginning to shift to focusing more on indicators showing weakening economic activity, which should undermine future inflation, rather than only focusing on the remaining signs of inflation persistence.
“However, according to the BoE’s latest forecast, UK CPI is set to be notably above 3% for the majority of this calendar year, which highlights that the risk of inflation persistence remains real and could easily prompt the balance of opinion on the MPC to shift once again.
“The BoE’s notable downgrade to UK growth this year would also suggest the OBR will downgrade their own expectations at the March statement. Combined with the increase in Government borrowing costs since early September 2024 (the previous assumption for borrowing costs made by the OBR), it would seem very likely that Rachel Reeves will have to enact some measures of fiscal consolidation to meet her fiscal targets.”
Douglas Grant, Group CEO of Manx Financial Group: “The Bank of England’s decision to cut interest rates aligns with the positive news offered by the modest rise in UK GDP, providing a potential boost for UK investments after a period of economic stagnation.
“However, high inflation continues to squeeze costs and consumer spending, while geopolitical instability and fragile supply chains demand diversification and sustainable practices. With investment hesitancy rising, adaptable lending strategies and a focus on resilience are vital to navigating this uncertain economic landscape.
“The current challenges facing SMEs is reflected by research from Manx Financial Group which reveals that nearly a third of UK SMEs have paused or scaled back operations due to financial constraints. Although this marks an improvement from 40% in the previous year, significant hurdles persist. Access to external financing remains a challenge for around 10% of SMEs, highlighting the need for a more stable and inclusive lending environment. With the SME lending landscape rapidly evolving, Labour must urgently recalibrate its policies to better support these essential businesses.
“Given SMEs’ role in driving growth, employment, and innovation, the Labour Government must create a stable lending environment for their resilience and expansion – although at this stage, the Government’s growth ambition hasn’t yet translated into legislation governing access to financing in the UK . Both traditional and alternative lenders are key to this, as inadequate financing could hinder recovery amid rising taxes, geopolitical tensions, and cost-of-living pressures.”
Kathleen Brooks, research director at XTB: “The BOE’s narrative is very difficult to interpret, and it can be read as both dovish and hawkish. The immediate reaction has been dovish: bond yields fell, and this weighed in the pound, which is the weakest performer in the G10 on Thursday.
“The OIS market is still expecting just over 2.5 further rate cuts this year, about the level of rate cuts as has been expected in recent weeks. There has been a small reduction in the market’s expectations for interest rates by year end, they have fallen to 3.76% on Thursday, they were 3.86% on Wednesday.
“So, why is the pound still weak and 2-year bond yields remain at their lowest level since before Chancellor Rachel Reeves’ notorious budget? We think that the bond market, and by extension the FX market, is doubting the BOE’s message that it will only cut rates in a gradual and careful manner, instead, the market may not buy the BOE’s message about the degree of slack in the economy. There is a huge amount of economic data due before the BOE’s next meeting, which could shift the dial for rate cut expectations …
“Overall, the market has had a mixed reaction to this report, but growth fears are weighing heavily on the pound. Although bond yields are falling on Thursday, the weaker growth forecasts combined with extensive Gilt issuance, could lead to the bond market vigilantes targeting the UK once again.”
Daniel Austin, CEO and co-founder at ASK Partners: “The Bank of England’s decision to lower interest rates to 4.5% marks a pivotal moment for the UK real estate market. While this move may provide some relief for borrowers, the broader impact will depend on how quickly lenders adjust mortgage rates and how sustained the rate-cutting cycle becomes. For homeowners and prospective buyers, lower rates should, in theory, make mortgages more affordable.
“However, the current market dynamics, where fixed mortgage rates have remained elevated despite previous signs of easing, suggest that any immediate impact may be muted. That said, a more stable rate environment could help restore buyer confidence, particularly among those who had been waiting for clarity before entering the market.
“For investors and developers, the trajectory of rate cuts will be crucial. With inflation now closer to the Bank’s 2% target, there is renewed optimism that financing conditions will improve, unlocking capital for new developments. Demand remains strong, particularly in sectors like co-living and build-to-rent, where supply constraints continue to drive investor interest.
“As we approach a potential shift in government policy and economic strategy, real estate stakeholders should remain agile. If rates continue to fall towards 3.5% by year-end, as some predict, this could fuel a more sustained recovery in transaction volumes and investment flows. However, uncertainty remains, and prudent financial planning will be key as the market navigates this transition.”
David Bharier, Head of Research at the British Chambers of Commerce: “Given the raft of cost pressures and global economic uncertainties businesses are facing, today’s interest rate cut provides a measure of relief for SMEs.
“Since the Autumn Budget our research has shown a significant fall in business confidence, with fewer firms expecting to increase turnover over the next twelve months. The Bank’s report references our data, and their GDP forecast reflects this. Policymakers must act quickly and work with businesses to rebuild confidence and drive growth.
“UK businesses are facing a range of challenges. Domestically, firms face increased tax bills and employment costs within weeks, with national insurance and minimum wage hikes. Internationally, a looming trade war could hit many UK importers and exporters. This is likely to feed into heightened inflation throughout the year.
“The government needs to pull all levers possible to ease the cost pressures on firms and unlock investment opportunities. That includes accelerating business rate reform, supporting infrastructure projects and boosting trade opportunities.”
Susannah Streeter, head of money and markets, Hargreaves Lansdown: “The risks of stagflation are stark. Inflation remains above the Bank’s 2% target and price pressures piling up, but the economy is stagnating, and business confidence has taken a knock.
“The vote was resoundingly for a cut, with two members wanting to go even further pushing for a 0.5% reduction. This has increased expectations that further rate cuts will come more quickly this year with markets now pricing in the likelihood that the base rate will be close to 3.75% by December, indicating three further reductions. That’s been reflected in the movement of the sterling, which has continued to fall back against the dollar.
“The Bank has slashed its forecast for growth this year, which keeps the door wide open for multiple rate cuts to come. Other data out this week shows that job cuts are landed at the steepest pace in four years in the services sector and the activity in the construction sector contracted unexpectedly in January for the first time in a year.
“Given the deteriorating economic picture, financial markets are now expecting at least two maybe three further interest rate cuts this year, with the base rate likely to drop below 4% by 2025. The speed will depend on how the economy responds in the months to come. Businesses are already feeling the pain of upcoming changes to National Insurance contributions, as with suppliers starting to pass on the costs of higher expected wage bills.
“How all this will land in terms of consumer prices and demand for goods and services in the economy is not yet clear. The threat of Trump’s tariffs also clouds the picture. A knock to global trade could stymie growth further, and although the dominance of services in US exports should offer insulation, and the UK could even potentially benefit as trade flows shift and investors seek safer tariff-free havens. So, while there still may be a pause for thought in March, with further cuts looking more likely once summer arrives.”
Nicholas Hyett, Investment Manager at Wealth Club: “Recent economic data points to a slowdown in the UK economy – GDP came in lower than expected, inflation has fallen and unemployment has ticked up. The outlook is gloomy too, with many companies thought to be considering job cuts before a rise in the living wage and higher national insurance contributions in April.
“Against that backdrop the Bank’s decision to cut rates is no surprise and was widely expected. Rate-setters, and the government, will be hoping a 0.25% cut provides the post January pick-me-up the economy needs – though some MPC members voted for a more radical reduction.
“However, the real risks in the future are largely unknown. Will Trump’s trade war rock the global economy? Will the UK become a tariff target? How many jobs are at risk from rising labour costs? Will the Chancellor hike taxes again in the spring? With all those unknowable risks out there, this rate cut could be seen as much as a shot in the dark than a shot in the arm.”
Lindsay James, investment strategist at Quilter Investors: “In a sign that the UK economy is looking increasingly fragile, even as inflation remains at palatable levels, the Bank of England has responded by lowering interest rates to 4.5%.
“The BoE’s prediction that inflation peaks at 3.7% in Q3 this year is quite shocking given previous forecasts and certainly won’t be helped by the April hike in minimum wages or higher National Insurance contributions on employers.
“So much so the previously expected pickup in growth this year is quickly becoming wishful thinking, however this remains the Bank’s key focus. Hiring has remaining subdued, whilst data from the service economy has highlighted that the pace of job cuts has accelerated to its fastest in four years as wage growth continues to outpace inflation.
“With supply chains passing on employment cost increases to the end customer, this is likely to put upward pressure on inflation in the coming months but will also put profit margins under pressure as consumers are likely to resist paying more.
“Whilst the economic picture has undeniably worsened in recent months, so too pockets of optimism remain. With wage growth so strong but sentiment weak, consumers have been rebuilding savings that will at some point be released into the economy, whilst the housing market continues to look resilient and further support will come from the two or three quarter point cuts to the base rate expected by the end of the year.
“The UK’s issue with productivity and growth will not be solved overnight, however, and as such the government must rely on the Bank of England to stimulate the economy. But, this all takes time to feed through and thus all adds up to the most likely outcome being yet more low, anaemic, growth rather than recession.
“For investors, this situation does present somewhat of a silver lining. With expectations already so low, UK equities, which have outshone the returns from the US year to date, continue to earn their place in portfolios.”
Kevin Brown, Savings Specialist at Scottish Friendly: “While the decision to cut the interest rate was widely expected, the Monetary Policy Committee (MPC) had a range of competing factors to consider. Wage pressures have remained, with the latest data showing a 5.6% uplift in wages in the three months to November 2024. However, services inflation had been a significant headache for the rate setters and it dropped from 5% in November to 4.4% in December, opening a window for today’s cut.
“The MPC’s decision also reflected sliding UK business confidence in the wake of the October budget, and surveys suggesting employers are poised to lay off workers. The UK economy appears to be at or near stagnation, and in dire need of the boost lower interest rates could provide. There is also the uncertainty surrounding the looming trade war set in motion by US tariffs.”