The Bank of England made its first reduction in the interest rate on Thursday, signaling further cuts would come as it deducted the prediction of the UK growth for 2025.
The Central Bank lowered its standard interest rate by 25 base points to 4.5%, with the majority of seven members from the nine-strong monetary policy committee voting in favor. Two of the MPC members had voted for a greater reduction of 0.5 percentage points.
Andrew Bailey, Governor of the Bank of England, told reporters that the Central Bank expects to make further decrease in norms this year.
“We expect to be able to lower the bank level as the disinflation process continues. But we will have to judge the meeting by meeting as far and as soon as.”
“We live in an unsafe world and the road ahead will have bumps,” he said at a press conference.
Economists had been widely waiting for the Central Bank to cut rates after a number of growth data in the UK.
The economy was flattened in the third quarter, according to data issued in December, while the last monthly reading of GDP showed that the economy expanded only 0.1% in November after decreasing by 0.1% in October. Poor retail data last month also increased expectations for BOE to lower rates. Boe halved the growth forecast that the United Kingdom was expecting to see in 2025, from 1.5% to 0.75%.
Britain’s inflation rate, meanwhile, fell to a 2.5% lower than expected in December, with rising essential prices, slowly slowing down the expectations that Central Bank policymakers would run towards their cutting first of 2025. The intention of central bank inflation is 2%.
Boe said in a statement that there had been “considerable progress in disinflation over the past two years as previous external shocks have been reduced.”
However, she emphasized that “a gradual and cautious approach to further attracting monetary policy restriction is appropriate.”
Buses cross the London Financial Circle outside the Exchange Royal near the Bank of England on July 2, London, the United Kingdom.
Mike KEMP | In the picture | Getty Images
BOE monetary policy members now need to judge how to balance the need to increase growth with the inflationary risk posed by a new trade war, as US President Donald Trump plans to impose fees for the nearest trading partners of America, and threatened to implement the same measures in the EU and MB
The bank’s monetary policy committee said it will “continue to closely monitor the risks of inflation perseverance and what developing evidence can reveal about the balance between supply and aggregate demand in the economy”.
“Monetary policy will continue to remain restrictive for a long time, until the risks to inflation are steadily turning to the 2% target in the middle term have been further distributed,” he concluded.
Responding to the BOE interest rate decision, the United Kingdom Chancellor Rachel Reeves said in a statement that lowering the interest rate of BOe was “welcome news”, but said it was “not satisfied with the scale yet of growth. ”
The Chancellor claimed that the Treasury’s plans to “start economic growth” would work to “put more money in the pockets of working people” and said the government was committed to “obtain the blockers to get the British building again, By tearing unnecessary regulatory barriers and investing our country to rebuild roads, railways and life infrastructure. “
What comes next?
Economists are now meditating the trajectory of interest rates in 2025, given that Central Bank policymakers will be careful for the United Kingdom to find themselves “captured between trade wars and poor internal moment”, Kallum Pickering, The Economist Chief in Peel Hunt, noted at first.
“The critical question that policymakers face is whether they will signal that another cut can come as soon as March or that they will stay in the course specified last year – with decreasing rates coming at a pace of rhythm one for the quarter? ”He said in comments by email of Monday
The basic case of Peel Hunt, he said, was that BOE will hold a quarter -cut pace and that the bank would wait until the May meeting before attending a second cut this year.
“However, the risks are reduced to policymakers who signal a willingness to respond more strongly to economic weakness – implying to expect the next March 20 meeting as soon as possible,” Pickering said.
The first cut of BOE comes after a few difficult months for Reeves who has faced sustainable pressure since the discovery of the treasury plans last fall that were determined to increase the tax burden on British businesses. The package attracted widespread criticism from industry leaders for the potential impact on investment, work and economic growth.
Reeves defended plans, saying difficult measures were needed to achieve economic stability and that there were no “alternatives”. She has also said that tax raising for businesses would be single, telling the British industry confederation last November that it “was not returning with more borrowings or more taxes”.
Some economists believe that the Central Bank may take a more gradual approach given the inflationary risks posed by the potential Trump tariffs, and the fiscal position taken by the United Kingdom Government.
“Despite the latest poor news of activity and uncertainty about global perspective due to US import fees, the strongest news of internal price pressures means that the Bank of England will probably continue to lower interest rates alone Gradually, “Ashley Webb, a UK economist in the capital economy, said in a note Wednesday.
“But while IIK inflation may withdraw from 2.5% in December last year to about 3.0% later this year, we think a decrease to below 2.0% next year will promote bank to lower interest rates … at 3.50% by the beginning of 2026, rather than 3.75-4.00% as investors predict, “he noted.