Bank of England cuts interest rates and halves growth forecast

The Bank of England has drastically reduced its growth forecast for 2025 and cut interest rates to the lowest level in over 18 months, according to its latest Monetary Policy Report.

The central bank now predicts that the UK economy will grow by just 0.75% this year, a significant reduction from its previous estimate of 1.5%. The downgraded forecast accompanies a cut in interest rates from 4.75% to 4.5%, with Governor Andrew Bailey emphasising that rates remain on a downward path.

While the growth outlook for 2025 has been slashed, the Bank of England has revised its predictions upward for the following years. The economy is now expected to grow by 1.5% in both 2026 and 2027, an improvement from the earlier forecast of 1.25%.

The decision to reduce interest rates is part of the Bank’s ongoing efforts to control inflation, which has been a key concern over the past year. Higher interest rates have successfully slowed price rises, bringing inflation close to the 2% target since mid-2024. However, inflation is expected to follow a “bumpy path” and temporarily rise to 3.7% this year, partly due to higher energy prices.

Governor Bailey stressed the importance of ensuring that inflation remains low and stable in the long term.

“We need to be confident that inflation will remain low and stable in a lasting way,” he said. “The Monetary Policy Committee will decide carefully by how much and when it can cut interest rates.”

The report highlights the progress made in reducing inflationary pressures, with household energy bills now around 25% lower than their recent peaks and food price inflation slowing significantly. Despite these improvements, the Bank cautioned that the economy could face unexpected challenges, such as global trade tariffs or developments in the Middle East, which could impact prices.

Looking ahead, the Bank of England plans to continue monitoring economic conditions closely. “The best contribution the Bank can make to support economic growth and people’s prosperity is to make sure we have low and stable inflation,” Bailey said. “If things evolve as expected, we expect to reduce interest rates further.”

The full Monetary Policy Report for February 2025 is available on the Bank of England’s website at: https://www.bankofengland.co.uk/-/media/boe/files/monetary-policy-report/2025/february/monetary-policy-report-february-2025.pdf