(Commonwealth_Europe) The Bank of England has significantly reduced its growth forecast for the UK economy in 2025, halving its previous estimate. Initially, it had anticipated the economy to grow by 1.5%, but the latest projection indicates growth of just 0.75% this year. This change comes at a challenging time for the government, which has prioritized economic development as a central policy objective. In a bid to bolster the country’s economic performance, the Chancellor recently unveiled several measures designed to stimulate growth. However, despite these efforts, the bank’s downgraded forecast casts a shadow over the government’s ambitions.
As part of the ongoing adjustments, the Bank of England has decided to lower interest rates, reducing them from 4.75% to 4.5%, which many analysts expected. Alongside this interest rate cut, the bank revised its growth projections for the next few years. Although the economy’s growth outlook for 2025 was downgraded, the bank increased its forecasts for 2026 and 2027. It now expects growth of 1.5% in both of those years, up from the previous prediction of 1.25%.
However, inflation remains a concern, and the bank warned that the combination of rising energy and water bills would likely lead to a sharp increase in inflation later this year. The inflation rate, which measures the pace at which prices rise, is now expected to reach 3.7% and is forecasted to remain above the bank’s 2% target until the end of 2027. Given the persistent inflationary pressures, the bank has indicated it will proceed cautiously with any further interest rate cuts. The governor, Andrew Bailey, emphasized the bank’s focus on a gradual and careful approach, taking into account both domestic and global factors that could influence inflation, such as potential trade tariffs from the US.
The news of the rate cut has been welcomed by the Chancellor, Rachel Reeves, who acknowledged that while the cut was a positive move, the government remained unsatisfied with the current growth rate. She reiterated the government’s commitment to accelerating economic growth and emphasized that their “Plan for Change” aimed to do more, and more quickly, to boost the economy and ensure that working people could benefit from the resulting growth. In contrast, the shadow chancellor, Mel Stride, while welcoming the rate reduction, pointed out that the government’s economic policies, particularly what he referred to as a “disastrous budget,” could mean fewer rate cuts than expected this year.
For homeowners, the rate cut offers some relief. Those on tracker mortgages, around 629,000 in total, which adjust according to the base rate, will see their monthly repayments typically fall by £29. Homeowners on standard variable rate mortgages, which are also linked to the Bank of England’s rate, will have to wait and see if their lenders choose to follow suit with similar reductions. Fixed-rate mortgage holders will not see any immediate changes, though new and renewing customers may find lower rates available. However, savers could be disappointed, as lower interest rates generally translate into reduced returns on savings accounts.
One couple, Nicola and John Price, expressed their hope that the rate cuts would lead to more manageable mortgage costs in the future. With 18 months left on their current mortgage deal, they both welcomed the reduction, hoping that interest rates would remain low. Nicola wished for rates to stabilize around 3%, and while she was optimistic about this outcome, her husband John acknowledged that others, especially older generations who rely on savings income, might not share the same enthusiasm. They are keenly aware of the balance that must be struck between lowering borrowing costs and maintaining returns for savers.
According to the Bank of England’s quarterly inflation report, the UK economy has shown little growth since March of the previous year. Between July and September, the economy stagnated, posting zero growth. Looking ahead, the bank has revised its forecast for the final quarter of 2024, now expecting a slight contraction of 0.1% rather than the 0.3% growth it had predicted earlier. This marks a troubling trend, as two consecutive periods of economic contraction would officially constitute a recession. The bank now anticipates that the economy will grow by only 0.1% between January and March 2025, a reduction from the previously projected 0.3%.
The upcoming official growth figures, set to be published next Thursday, will provide further clarity on the state of the UK’s economy, though the Bank of England’s cautious outlook suggests that a robust economic recovery may remain elusive shortly. The situation poses a significant challenge for policymakers, as they navigate the complexities of managing inflation, stimulating growth, and supporting households and businesses in the face of uncertainty.
