The Bank of England has decided to keep interest rates at 4.75%, following a vote by its rate-setting committee. In a surprising twist, three of the nine committee members advocated for a reduction, proposing a cut to 4.5% in an effort to stimulate economic growth.
The Bank cited weaker-than-expected economic performance, with no growth forecasted between October and December. This decision aligns with concerns over a stagnant economy, despite ongoing inflationary pressures. Although the rate remains unchanged, a gradual reduction in borrowing costs is still anticipated for 2025, with the first potential cut possibly occurring in February.
Bank of England Governor Andrew Bailey explained the approach, stating, “We think a gradual approach to future interest rate cuts remains right, but with the heightened uncertainty in the economy, we can’t commit to when or by how much we will cut rates in the coming year.”
Recent economic figures have shown that inflation remains above the Bank’s target, while wages are growing faster than expected. However, economic growth is lagging. The Bank had originally predicted a 0.3% growth for the last quarter of the year but has since revised this to a flat 0% growth. This revision is a setback for the Labour Party, which has made boosting economic growth its central focus, pledging to achieve the highest sustained growth rate among the G7 nations.
Minutes from the Bank’s meeting also highlighted uncertainty around the impact of measures introduced in the Autumn Budget. Chancellor Rachel Reeves had announced £40 billion worth of tax hikes, including an increase in National Insurance contributions for employers, as part of efforts to balance the books.
By the time of the Bank’s next decision in February, more data will be available regarding the effects of these fiscal policies, as well as potential changes to US trade tariffs under incoming President Donald Trump.
Following the Bank’s decision, Chancellor Reeves expressed her support for the Bank’s approach, saying, “We want to put more money in the pockets of working people, but that is only possible if inflation is stable, and I fully back the Bank of England to achieve that.”
However, Liberal Democrat Treasury spokesperson Daisy Cooper criticized the government’s economic strategy. “The new government needs to work much harder if it’s going to turn the economy around any time soon,” Cooper said. “That must start by scrapping the self-defeating jobs tax, which promises to make the crisis in health and care even worse.”
