The Bank of England cut its key interest rate for the third time in seven months, warning that the outlook for the U.K. economy over the next year has darkened.
In a widely expected move, the Bank lowered the Bank Rate to 4.50 percent from 4.75 percent, but said that given a pick up in inflationary pressures, a “gradual and careful approach” to monetary policy was needed going forward.
In a double blow to Chancellor of the Exchequer Rachel Reeves, the Bank cut its growth forecast for this year to 0.75 percent, from the 1.5 percent it had forecast at its last regular update in November.
At the same time, it acknowledged that inflation will stay considerably above target for the whole of the year. It now expects inflation to average 3.5 percent in 2025, up from an estimate of 2.75 percent in November.
Inflation has already rebounded to 2.5 percent as of December after a steep decline from its peak over 11 percent in 2022. Threadneedle Street has argued that this is likely to just be a bump, with inflation gradually tailing off under the influence of economic weakness. But it now expects headline inflation to be back at 3.7 percent by summer.
Reeves has had a rocky start as Chancellor: growth already stalled in the third quarter of last year and figures due out next week are expected to show a second straight quarter of stagnation, reflecting the dampening impact of her budget that announced large tax increases but failed to cut government borrowing. The Bank said it expects growth to revive from the middle of the year.
The Bank also cautioned that tariffs threatened by President Donald Trump’s White House create “downside risks to global activity.”
The U.K.’s services-based economy is somewhat shielded from the threat of U.S. tariffs, given that the country’s trade with the U.S. is relatively balanced. That puts it lower down the list of Trump’s prime targets. However, any abrupt dislocation in the global economy would hurt Britain regardless, adding to the already strong headwinds facing the economy.
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