Interest rate cut to 4.5% amid warning on inflation

Seven members on the Monetary Policy Committee (MPC) voted to reduce the rate by 0.25%, the lowest level since May 2023, with two members wanting to see the rate slashed by 0.5%.

The Bank claimed the interest rate was cut after ‘substantial progress on disinflation over the past two years’ although it warned that it was focused on ‘maintaining the bank rate in restrictive territory’.

Andre Bailey, governor of the Bank said: ‘We live in an uncertain world, and the road ahead will have bumps. We expect inflation to increase this year, to a peak of about 3.7%, before returning to the 2% target. We will set Bank Rate to ensure that it does so sustainably.’

With inflation up at 2.5% and GDP growing minimally by 0.1% in November, Nigel Green, CEO of deVere Group, said the third rate cut in a year could be a signal of bad news.

‘This rate cut signals that the UK economy is facing significant headwinds. While lower borrowing costs might offer temporary respite for businesses and consumers, the underlying problem remains - growth is weak, and inflationary pressures persist. Investors need to be on high alert,’ Green said.

The Bank has said it does not expect GDP to show any growth until mid 2025 after being ‘weaker than expected’ in 2024 with only a 0.1% in the first quarter of 2025.

This is coupled with the increase in employers’ National Insurance and minimum wage increases from April which have had a negative effect on business confidence going into 2025.

The cut will give some respite to businesses hammered by rising costs. However, there are concerns about the impact of threatened global tariffs by the US, which if levied heavily on the EU could impact UK business, and the UK is cutting rates slower than major competitors.

Despite predicting an increase in inflation to 3.7%, the bank governor did not mention US tariffs at all in his speech.

Source - Business & Accountancy Daily

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