On Thursday, the Bank of England (BoE) lowered interest rates by 0.25%, moving them down to 4.5%. The bank thinks that a sudden rise in inflation this year will not last long. However, two officials, Catherine Mann and Swati Dhingra, wanted an even bigger cut to 4.25% because they saw signs of slower economic growth.
Governor Andrew Bailey said the BoE will carefully watch the UK economy and global situations before making further changes to interest rates. This is different from what he said in December when he only mentioned going slowly.
The UK economy has hardly grown since mid-2024, partly due to concerns about tax increases by Finance Minister Rachel Reeves and the possibility of a global trade conflict started by former U.S. President Donald Trump. The BoE predicts the economy shrank by 0.1% in the last part of the year.
This cut is only the third time the BoE has lowered rates since starting to reduce them from the highest level in 14 years last August. UK rates remain among the highest in developed countries and are slightly above the U.S. Federal Reserve’s rates of 4.25% to 4.5%.
Previously, economists thought the BoE might cut rates four times this year, lowering them to 3.75%, but now they expect cuts to only reach about 4% this year.
Minutes from February’s decision reveal some BoE officials wanted to be careful about future rate cuts due to low productivity that could push inflation higher. They noted inflation is currently above the target of 2.5% and is expected to peak at about 3.7% later this year due to rising energy prices and planned hikes in costs for water and bus services.
The BoE does not expect inflation to drop back to its target until late 2027, which is six months later than previously predicted. They also cut their growth forecast for this year to 0.75% because of weak business and consumer confidence, but slightly raised estimates for growth in 2026 and 2027 to 1.5%.
The bank is unsure how future U.S. tariffs might affect UK inflation but believes that higher global tariffs could slow down growth in Britain, even if the UK is not directly targeted.
The two officials who wanted a bigger rate cut had different reasons for their views. One thought it would send a stronger message to markets while believing that rates will need to stay high for now. The other believed that slow growth would help inflation drop to the target over time.
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