The Bank of England has announced on February 6, 2025, another reduction to its base interest rate, bringing it down to 4.5% from 4.75%. This decision marks the third consecutive rate cut since last August, indicating the central bank's shift to loosen monetary policy amid sluggish economic activity and declining inflation rates.
Significant progress has been made on disinflation, which the Bank's Monetary Policy Committee (MPC) noted had helped guide its decision. Notably, the Consumer Prices Index (CPI) inflation fell to 2.5% by December 2024, aligning closely with the Bank’s target of 2%. The MPC voted by 7-2 to reduce the rate by 0.25 percentage points, with some members advocating for more aggressive reductions.
The MPC's findings come after inflation peaked at over 11% during 2022, with interventions via higher interest rates having worked to stabilize price rises significantly. The gradual decrease to 4.5% is seen as a response to weak gross domestic product (GDP) growth, which, according to analysts, has been stagnated for several months.
Martin Lewis, founder of MoneySavingExpert.com, elaborated on the broader financial ramifications of the rate cut during his appearance on BBC Radio 5 Live, stating, “If you’re on a variable rate mortgage, your rate is likely to drop by around a quarter of a percent. For those holding £100,000 mortgages, this could mean monthly repayments decrease by approximately £15.” He emphasized the impact this could have on consumer spending, thereby stimulating the economy.
For savers, the continued competition among cash ISOs may buffer some impacts from the base rate cut, as providers strive to attract deposits. Even so, rates on variable savings accounts are expected to reflect the recent cuts within two to four weeks, aligning expectations with the reduced base rate.
While the MPC remains optimistic about controlling inflation and supporting economic growth, some analysts caution against the risks associated with this strategy. Nicholas Mendes from John Charcol noted, “The Bank of England’s decision to cut the base rate reflects growing concerns over the UK's sluggish economic growth. The challenge now is to strike the right balance without allowing inflation to creep back up.”
Indeed, wage growth remains stubbornly high at 5.6%, and some experts fear rising demand driven by lower borrowing costs could rekindle inflationary pressures. Future movements on interest rates may be contingent on global economic conditions, including potential trade policies under the U.S. administration and the influx of tariffs affecting inflation rates worldwide.
The Bank of England has been tasked with regulating its policies to maintain inflation around the target rate without stifling economic development. The committee’s recent analysis projects CPI inflation to rise again temporarily, estimated at 3.7% for the latter half of 2024, primarily due to seasonal energy price changes.
It has become increasingly clear to the MPC and economists alike: the decision-making process for future rate cuts will be deeply intertwined with developments within the labor market and the patterns of wage growth and productivity moving forward. “The next moves will depend on how these factors evolve,” Mendes remarked, highlighting the delicate balancing act the central bank must navigate.
Looking at the long-term effects of the changes, the MPC has considered various trajectories for the national economy, recognizing both local and global uncertainties, which could potentially influence inflation and growth rates. It is evident as the Bank monitors economic indicators closely; any signals of persistent inflation could lead policymakers to reconsider their currently more accommodative stance.
While speculation about future rate cuts looms—some experts projecting it could fall to 4% by year-end—persistent global instability could thwart expectations, complicate forecasts, and cause the central bank to approach its agenda more cautiously.
Overall, the Bank of England's latest maneuvers reflect its commitment to supporting the economy during uncertain times, showcasing the delicate balance monetary authorities must strike between fostering growth and controlling inflation.