Bank of England cuts interest rates to 4.5%

In a widely anticipated move, the Bank of England (BoE) has cut its benchmark interest rate by 0.25 percentage points to 4.5%, brings the cost of borrowing down to its lowest level since June 2023.

The decision, made at the Monetary Policy Committee (MPC) meeting ending on February 5, 2025, was supported by a majority vote of 7–2. Two members of the committee preferred a more aggressive cut to 4.25%.

The rate cut comes as a response to the progress made in reducing inflation and wage growth, bringing the rate down to 4.5% from 4.75%. The BoE believes that this reduction is a step towards achieving its 2% inflation target sustainably.

The MPC emphasised the need for a gradual and careful approach to further monetary policy adjustments, considering the uncertainties around demand and supply in the economy. A weaker demand relative to supply could lead to lower inflationary pressures, while constrained supply could sustain domestic price and wage pressures.

The Bank of England has also drastically reduced its growth forecast for 2025 by half, from 1.5% to 0.75%, according to its latest Monetary Policy Report.

Neil Rudge, Chief Banking Officer for Commercial at Shawbrook, welcomed the decision, highlighting its positive impact on the business community.

“The decision to cut the base rate to 4.5% will be welcomed by the business community, which has been on the receiving end of a string of difficult economic changes in the past year. A stagnant economy, the looming increase to NIC for employers and the potential for tariff induced inflation means SMEs will have lots on their minds in the coming months.

“On the positive side, today’s decision should make finance more accessible for SMEs who have previously been holding off growth plans. The onus is on providers now to offer flexible solutions that meet a diverse market.”

Mike Randall, CEO at Simply Asset Finance, said: “Businesses up and down the country will be breathing a sigh of relief with rates ticking downward.

“Not only will it give some much-needed breathing space for those squeezed by the NI rise; those eager to grow will find borrowing cheaper. Combined with the recent publishing of the Governments’ growth strategy, the outlook for 2025 is looking much more positive.

“But with Trump-led trade wars perhaps tempering the speed of future cuts, the Government cannot afford to take its eye off the ball when it comes to creating an environment that enables domestic growth to flourish.”

Alpesh Paleja, Deputy Chief Economist, CBI, said: “Today’s cut to interest rates was in line with our expectations and reinforces our view of a gradual loosening in monetary policy over this year.

“However, the Monetary Policy Committee are increasingly having to balance conflicting objectives. The CBI’s surveys show that business’ growth and hiring expectations have weakened. But inflation expectations are picking up, exacerbated by the rise in employment costs arising from October’s Budget.

“Therefore, while we still expect a few more rate cuts this year, risks to this forecast are now balanced in either direction. Incoming data over the coming months will be key in determining how the MPC will move next.”

The BoE will continue to monitor inflation persistence and the balance between aggregate supply and demand, adjusting monetary policy as needed to ensure sustainable inflation control.

This rate cut marks the third reduction since the peak of 5.25% last August, reflecting the BoE’s ongoing efforts to support economic growth amid a stagnant economy.