British Rate Cut Motivated By Soft Growth
February 6, 2025
The Bank of England’s rate cut to 4.5% from 4.75% was primarily motivated by weaker British economic activity than central bank officials had been assuming. GDP growth over the four quarters ending in the current one is projected to be a mere 0.4%, prompting a halving of the projected 2025 growth rate to just 0.75%. This revision avoids recession territory but just barely. The near-term prognosis for inflation, on the other hand, has deteriorated. From a 2.5% year-on-year rise in the final month of 2024, CPI inflation — due to higher utility costs and wage pressure and the possibility of a tariff war — is now expected to rise to 2.8% this quarter and 3.5% next quarter before cresting in the summer at 3.7%. Subsequent subsiding to the 2.0% target will take a tad of two years to complete.
The 7-2 vote behind today’s 25-basis point interest rate cut, the third one since August, elicited two dissents in favor of reducing the rate by 50 basis points. Officials consider 4.5% to still imply a clearly restrictive monetary stance, and they defended that policy, saying, “weakness in observed activity and employment going forward could continue to reflect constrained supply rather than an accumulation of economic slack. This view continued to warrant a cautious and gradual removal of monetary policy restriction.”
Copyright 2025, Larry Greenberg. All rights reserved. No secondary distribution without express permission.
Tags: Bank of England
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