Bank of England cuts rates amid inflation concerns and slowing growth

The Bank of England lowered its benchmark interest rate by a quarter-point to 4.5% on Thursday, balancing the need to support a sluggish economy against persistent inflation pressures. While the move was widely anticipated, two policymakers pushed for a more aggressive cut to 4.25%, highlighting divisions within the central bank over how quickly to ease monetary policy.

The decision underscores the BoE’s delicate position. Inflation forecasts have been revised higher, with price pressures expected to peak at 3.7% in the third quarter—well above the previous 2.8% estimate. Despite this, Governor Andrew Bailey signaled a measured approach to further rate reductions, emphasizing the need to closely monitor domestic and global economic developments.

“We are taking a gradual and careful approach to rate cuts,” Bailey said, in a shift from his December remarks that only referenced a “gradual” strategy.

Dissent and economic uncertainty

The split decision among policymakers was notable. Catherine Mann, a previous opponent of rate cuts, joined Swati Dhingra in advocating for a larger reduction to 4.25%. While the minutes did not attribute specific arguments to each official, one dissenter favored an “activist” approach—echoing Mann’s past calls for decisive action. The other viewed weak growth as sufficient justification for a more aggressive cut, arguing inflation would naturally return to target in the medium term.

The broader economic outlook remains fragile. The British economy has barely expanded since mid-2024, hampered by rising costs, tax hikes under Finance Minister Rachel Reeves, and the looming threat of a global trade war led by U.S. President Donald Trump. The BoE estimates GDP contracted by 0.1% in the fourth quarter, reinforcing concerns about stagnation.

Policy path uncertain

The rate cut marks the third reduction since the BoE began unwinding policy from a 14-year high last August, yet the UK still maintains some of the highest interest rates among advanced economies. The Federal Reserve’s current range of 4.25%-4.5% keeps U.S. borrowing costs roughly aligned with Britain’s, but markets anticipate divergent paths ahead.

Inflation risks loom

Despite slowing growth, inflation remains a persistent challenge. Consumer price pressures—already above the 2% target at 2.5%—are set to rise further, driven by higher energy costs and expected increases in regulated water bills and public transport fares. The BoE now sees inflation returning to target only by late 2027, six months later than previously forecast.

Meanwhile, the bank cut its growth outlook for 2025 to 0.75%, down from earlier projections. Weak business sentiment, sluggish productivity, and uncertainty over global tariffs all weigh on Britain’s economic prospects, though forecasts for 2026 and 2027 ticked slightly higher to 1.5% from 1.25%.

While the BoE remains uncertain about the direct impact of potential U.S. tariffs, policymakers warned that higher global trade barriers would likely dampen growth, even if the UK is not explicitly targeted.