The Bank of England is expected to lower its key interest rate later today, moving from 4.75% to 4.5%, in a bid to counter the UK’s sluggish economic performance.
Many analysts point to softer GDP figures and falling inflation as the central drivers behind the likely cut, though the Bank’s mandate to maintain inflation at 2% remains far from met.
After inflation dipped to 2.5% in December, speculation around a rate cut intensified—even though the headline figure still exceeds the Bank’s official target. Governor Andrew Bailey has signalled that any additional cuts this year will be “gradual”, without committing to specific timings or magnitudes. The Bank’s Monetary Policy Committee (MPC) will also publish a fresh outlook on inflation at midday, potentially offering clues to its future strategy.
Concerns around inflation have been exacerbated by US President Donald Trump’s imposition—and threat—of new import tariffs, which could push up global prices and reverberate through supply chains to the UK. Still, some economists argue that higher wage growth, rather than tariffs, is more likely to shape the Bank’s decisions.
In the meantime, the British economy is grappling with stagnant growth figures, posting little to no expansion in the last three months of 2024. The upcoming tax changes announced in the autumn Budget—including higher National Insurance contributions and an increased National Living Wage—are likely to add to business costs, potentially restraining hiring and investment.
Investor nervousness has contributed to heightened volatility in financial markets, sending gilt yields (the government’s borrowing costs) to multi-year highs and weighing on sterling. Looking ahead, the MPC’s decision may strike a delicate balance between preventing any further slowdown and avoiding a resurgence of inflation.
