The Bank of England (BoE) has lowered its key interest rate by 25 basis points to 4.5%, marking its third rate cut since August last year. The decision, aimed at supporting an economy facing sluggish growth, comes as inflation continues to ease.
Seven members of the Monetary Policy Committee supported the quarter-point cut, while two members, Swati Dhingra and Catherine L Mann, pushed for a more aggressive 50-basis-point reduction. Despite progress in reducing inflation, the BoE cautioned that price pressures remain a concern.
Consumer price index (CPI) inflation was recorded at 2.5% in the fourth quarter of 2024 but is expected to temporarily rise to 3.7% by the third quarter of 2025 due to energy costs and regulatory price changes. The bank reiterated that monetary policy would need to remain restrictive to prevent inflation from rebounding while also addressing weak economic growth.
The UK economy has struggled to gain momentum, with GDP growth falling below expectations from the BoE’s November forecast. Business investment and consumer confidence have weakened, raising concerns about future expansion. However, the BoE anticipates economic conditions will improve from mid-2025 onwards.
Adding to economic uncertainty, the central bank pointed to potential US trade tariffs as a key risk. The US, the UK’s second-largest trading partner, accounts for 22% of total exports, worth approximately £190 billion (€223 billion) or 7% of GDP. While most UK exports to the US are in the services sector and would not be directly affected by tariffs on goods, the BoE warned that broader trade restrictions could still have negative consequences for UK businesses and investment.
Following the announcement, the British pound declined, while the FTSE 100 index surged to record highs, reflecting investor optimism over lower borrowing costs despite lingering economic concerns.
