The Bank of England (BoE) has cut UK interest rates to their lowest level in over 18 months while also halving its economic growth forecast for 2025. This move comes amid concerns about inflation, slow economic recovery, and financial uncertainty.The UK economy is now expected to grow by 0.75% in 2025, down from the previous estimate of 1.5%, according to the Bank of England’s latest forecast.

Despite this downgrade, the BoE raised its UK growth predictions for 2026 and 2027 to 1.5% per year, up from 1.25%.

Prime Minister Sir Keir Starmer acknowledged concerns, stating that while he was "not satisfied with growth," the revised forecast "just spurs us on" to focus on economic improvements.

UK Interest Rate Cut to 4.5% – More Cuts Ahead?

As part of its monetary policy, the Bank of England reduced interest rates from 4.75% to 4.5%, signaling a shift toward lower borrowing costs.

BoE Governor Andrew Bailey confirmed that interest rates are on a downward path, but emphasized a cautious approach:
"We live in an uncertain world, and the road ahead will have bumps on it."

Bailey also stressed that the Bank would be "gradual and careful" in future rate cuts due to the risk of rising inflation and ongoing economic uncertainties.

UK Inflation Outlook and Rising Costs

The Bank of England inflation forecast predicts that inflation will rise to 3.7% before gradually declining to the target rate of 2% by the end of 2027.

Several factors could drive inflation higher, including:

• Rising energy bills and water costs
• Possible US trade tariffs impacting supply chains
• Higher employment costs due to increased National Insurance contributions

Government’s Economic Strategy Under Scrutiny

To boost the economy, Chancellor Rachel Reeves recently announced a series of economic measures.

However, last year's decision to increase employer National Insurance contributions from April has drawn criticism from UK businesses. Many argue this will:

• Increase costs for businesses
• Reduce investment in UK industries
• Impact job creation across the country

Bailey acknowledged that rising employment costs are affecting both business and consumer confidence, stating:
"There’s no question that the increase in the cost of employment does have an effect."

Shadow Chancellor Mel Stride welcomed the interest rate cut but warned that the government’s “disastrous Budget” could limit the number of rate cuts expected this year.

Meanwhile, Paul Johnson, Director of the Institute for Fiscal Studies, cautioned that the downgraded UK economic growth forecast could spell trouble for the government. If the Office for Budget Responsibility (OBR) follows the Bank’s projections, the Chancellor may struggle to meet her debt targets due to lower-than-expected tax revenues.

How the Interest Rate Cut Affects UK Mortgages and Savings

Mortgage Impact: Lower Payments for Some Homeowners

The interest rate cut is good news for homeowners on tracker mortgages, who will see an average monthly repayment decrease of £29.

However, those on standard variable rate (SVR) mortgages will have to wait and see if their lenders pass on the rate cut. Fixed-rate mortgage holders will see no immediate changes but may find cheaper mortgage deals when renewing.

Savings Accounts Could See Lower Returns

While lower interest rates can help mortgage borrowers, savers may see reduced returns on their savings accounts, affecting those who rely on interest income.

Is the UK Economy Heading for a Recession?

The Bank of England’s latest report reveals that the UK economy has been broadly flat since March 2024.

Key economic indicators show:

• Zero UK economic growth between July and September
• Expected 0.1% contraction in the final quarter of the year, instead of the previously predicted 0.3% growth

A UK recession is defined as two consecutive quarters of economic decline. While the UK is not officially in a recession, the weak growth outlook raises concerns about the risk of future economic contraction.

The Bank now expects just 0.1% growth between January and March, significantly lower than its earlier prediction of 0.3% growth.

Final Thoughts: What’s Next for the UK Economy?

The Bank of England’s interest rate cut signals an effort to boost the UK economy, but sluggish growth, rising inflation, and business concerns continue to create uncertainty.

Key Takeaways:

• Lower interest rates could ease mortgage costs for homeowners
• Economic growth forecasts have been slashed, raising recession concerns
• Inflation is expected to rise to 3.7% before gradually falling
• Businesses worry that higher employment costs could hit investment and jobs

As the government and the Bank of England navigate economic challenges, businesses and households will be watching closely to see how interest rates, inflation, and job markets evolve in 2025.

Source: bbc.co.uk, ChatGPT