Jamie Spencer
The Bank of England has halved its UK growth forecast for 2025, expecting the economy to expand by just 0.75%, down from its previous estimate of 1.5%. The downgrade comes as the central bank cut interest rates to 4.5%
UK Growth Outlook Dims
While the growth forecast for this year was revised downward, the Bank upgraded its expectations for 2026 and 2027, projecting growth of 1.5% in both years, up from 1.25%. However, economic activity remains sluggish, with the UK showing zero growth from July to September and now expected to shrink by 0.1% in Q4 2024.
Prime Minister Sir Keir Starmer acknowledged the weak growth outlook, stating, “I’m not satisfied with growth, but this just spurs us on.”
Inflation Concerns and Rate Cut Caution
Despite the rate cut, the Bank of England warned that inflation could rise again, with higher energy and water bills expected to push inflation to 3.7% before it gradually declines to the 2% target by 2027.
Governor Andrew Bailey signaled a cautious approach to further rate cuts, citing potential risks such as trade tariffs from U.S. President Donald Trump. “We live in an uncertain world, and the road ahead will have bumps on it,” Bailey said.
Mortgage Impact: Who Benefits?
The interest rate cut offers some relief to homeowners:
- Those on tracker mortgages will see an average reduction of £29 per month in repayments.
- Nearly 700,000 homeowners on standard variable rate mortgages will have to wait for lenders to adjust rates.
- Those on fixed-rate mortgages will not see immediate changes but may benefit from lower renewal rates.
However, the cut is bad news for savers, as lower interest rates mean reduced returns on savings accounts.
Political and Business Reactions
Chancellor Rachel Reeves has introduced measures to boost the UK economy, but her decision to increase employer National Insurance contributions has faced backlash from businesses.
Paul Johnson, director of the Institute for Fiscal Studies, warned that the Bank’s growth downgrade could have severe implications. “If the Office for Budget Responsibility follows suit, the chancellor is in big trouble,” he said, highlighting risks to tax revenue and spending plans.
Meanwhile, Shadow Chancellor Mel Stride acknowledged that while the rate cut was good news, the government’s economic policies could limit the number of cuts this year.
Conclusion
The Bank of England’s latest moves reflect a delicate balancing act between supporting growth and controlling inflation. While homeowners may see some relief, the broader economic picture remains fragile. With political uncertainty and global trade risks looming, the UK’s path to recovery looks far from smooth.
