Bank of England cuts interest rates

The Bank of England has decided to cut interest rates by a quarter of a percentage point to 4.5%.

The Monetary Policy Committee (MPC) voted by a majority of 7–2 to reduce the bank rate. Two members preferred to reduce it by 0.5 percentage points, to 4.25%.

In coming to its decision, it explained that there has been “substantial progress” on disinflation over the past two years, as previous external shocks have receded, and as the restrictive stance of monetary policy has curbed second-round effects and stabilised longer-term inflation expectations. 

“That progress has allowed the MPC to withdraw gradually some degree of policy restraint, while maintaining bank rate in restrictive territory so as to continue to squeeze out persistent inflationary pressures,” it added.

Inflation expected to rise

CPI inflation was 2.5% in 2024 Q4. Domestic inflationary pressures are moderating, says the Bank of England, but they remain somewhat elevated, and some indicators have eased more slowly than expected. 

Higher global energy costs and regulated price changes are expected to push up headline CPI inflation to 3.7% in 2025 Q3, even as underlying domestic inflationary pressures are expected to wane further. 

While CPI inflation is expected to fall back to around the 2% target thereafter, the committee says it will pay close attention to any consequent signs of more lasting inflationary pressures.

GDP growth had been weaker than expected at the time of the November Monetary Policy report, and indicators of business and consumer confidence have declined. 

GDP growth is expected to pick up from the middle of this year, it said. 

“The labour market has continued to ease and is judged to be broadly in balance,” it added.

“Productivity growth has been weaker than previously estimated, and the committee judges that growth in the supply capacity of the economy has weakened. 

“As a result, the recent slowdown in demand is judged to have led to only a small margin of slack opening up.”

In support of returning inflation sustainably to the 2% target, the committee judged that there has been sufficient progress on disinflation in domestic prices and wages to reduce the rate.

Uncertainties around demand and supply

“Based on the committee’s evolving view of the medium-term outlook for inflation, a gradual and careful approach to the further withdrawal of monetary policy restraint is appropriate,” it said.

“In addition to the risks around inflation persistence, there are also uncertainties around the trajectories of both demand and supply in the economy that could have implications for monetary policy. 

“Should there be greater or longer-lasting weakness in demand relative to supply, this could push down on inflationary pressures, warranting a less restrictive path of bank rate.” 

If there were to be more constrained supply relative to demand, the Bank of England says this could sustain domestic price and wage pressures, consistent with a relatively tighter monetary policy path.

The committee says it will continue to monitor closely the risks of inflation persistence and what the evolving evidence may reveal about the balance between aggregate supply and demand in the economy. 

“Monetary policy will need to continue to remain restrictive for sufficiently long until the risks to inflation returning sustainably to the 2% target in the medium term have dissipated further,” it added. 

“The committee will decide the appropriate degree of monetary policy restrictiveness at each meeting.”

When the Bank last reviewed rates in December, it decided to leave interest rates unchanged at 4.75%, highlighting recent increases in inflation.

The last cut in rates was in November, when it reduced rates by a quarter of a percentage point, from 5% to 4.75%.

The reduction followed a cut by the same amount in August, from 5.25% to 5%, after it had held rates at a 16-year high since August 2023, as it attempted to tackle rising prices across the UK.