Closing post
Time to wrap up….
The Bank of England has cut interest rates to 4.5%, as it halved its UK growth forecasts for the year and warned households would face renewed pressure from rising prices.
With the government under fire over the sluggish economy, the Bank’s monetary policy committee (MPC) voted by a majority of seven to two to reduce its key base rate, down from 4.75%, to provide some financial relief to borrowers.
It also sounded the alarm for the year ahead, downgrading its 2025 growth forecasts made in November from 1.5% to 0.75% and warning that inflation would reach a fresh peak of 3.7% by the autumn – almost twice the 2% target set by the government.
However, Andrew Bailey signalled Threadneedle Street stood ready to cut borrowing costs further this year despite the short-term rise in inflation, amid concerns over the weak economy.
He said:
“There will be a bump in the road [from inflation] but we don’t think that bump is going to have a lasting effect.”
He added that the Bank would take a “gradual and careful approach to reducing rates further.”
Sterling fell against the US dollar as investors bet on a deeper round of interest rate cuts, having been taken by surprise that two MPC members had pushed for a larger half-point reduction, including Catherine Mann, previously a leading hawk….
More here:
Bailey told reporters that the monetary policy committee expects to be able to cut rates further as “the disinflation process” continues.
In other reaction…
The pound has dropped by three-quarters of a cent against the US dollar tonight, to $1.243.
This helped drive the FTSE 100 share index up to a new alltime high.
The money markets now predict the Bank will cut interest rates twice or three more times this year – with cuts in May and August priced in.
Some economists, though, questioned whether the Bank’s decision was quite as dovish as the City reaction implies.
Others warned that the sharp cuts to UK growth forecasts were bad news for Rachel Reeves ahead of next month’s Spring Statement.
The chancellor said she “wasn’t satisfied” with the UK growth rate…
…while the Liberal Democrats called the weak growth forecast ‘putrid’…
…and prime minister Sir Keir Starmer said the rate cut would put more money in people’s pockets.
Here’s our analysis of the situation:
Goodnight. GW
Updated
Analysis: Unambiguously bleak Bank of England forecasts pave way for spending cuts
With the public finances tight and Rachel Reeves having pledged to balance the books, interest rate cuts are one of the few levers that could boost the UK’s economic growth in the short term, and the chancellor will be glad of the Bank of England’s quarter-point reduction on Thursday – and the clear signal that it is now in cutting mode.
Seven of the monetary policy committee’s (MPC) nine members backed the quarter-point drop, taking the Bank’s policy rate to 4.5%, while two wanted to be more “activist”, proposing a half-point cut. The Bank of England’s governor, Andrew Bailey, said the MPC would be “taking a gradual and careful approach to reducing rates further”.
Lower borrowing costs should feed through fairly rapidly to firms and households, compared with the impact from the runways, power stations and bridges that form the heart of the chancellor’s “plan for growth”. And against the right economic backdrop, rate cuts can act as a short-term mood-booster.
Yet the picture of the UK painted by the Bank’s quarterly inflation report, published alongside the 7-2 rate decision, is unambiguously bleak.
The MPC has halved its forecast for GDP growth in 2025, from the 1.5% it was predicting in November, to a sickly 0.75%. Economic output is expected to have contracted by 0.1% in the final three months of 2024 and expanded by just 0.1% in the current three-month period – narrowly skirting a recession, defined as two successive quarters of decline. Productivity, the Bank suggests – which Reeves badly wants to improve – has declined….
More here:
Updated
