Chancellor Rachel Reeves has been dealt another blow to her fiscal agenda as the Bank of England has downgraded its growth forecast for the UK economy to 0.75 per cent.
The central bank confirmed it has revised its prediction down from previous estimates of 1.5 per cent, before projecting that economic growth will accelerate again in 2026 and 2027.
In response to the Bank of England’s forecasts for the economy, the British pound fell sharply after the rate cut, while gold prices gained as investors sought safe-haven assets.
Earlier this morning, the Bank’s Monetary Policy Committee (MPC) announced the base rate will be slashed from 4.75 per cent to 4.5 per cent in a win for mortgage holders and debt borrowers.
However, the Bank of England’s downgrade is a roadblock for Reeves’s plans to “kickstart the economy” with the Chancellor recently unveiling plans for a third runway in Heathrow and the Oxford-Cambridge Growth Corridor.
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The Chancellor has been dealt another blow to her fiscal agenda as economy growth forecasts have been downgraded
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The latest revision from the Bank of England comes amid signs inflation is rising again, with estimates signaling to a higher-than-expected peak of 3.7 per cent later in the summer.
According to policymakers, while Reeves’s Autumn Budget policies will to boost economic growth by 0.75 per cent due to increased investment in public services, certain policies will have a detrimental impact on business activity.
Specifically, the Bank of England cited the hike to the rate paid in National Insurance contributions by employers as it is expected to pull down employment figures throughout the year.
Despite referring to the interest rate cut as “welcome news”, she said: “I am still not satisfied with the growth rate. Our promise in our Plan for Change is to go further and faster to kick-start economic growth to put more money in working people’s pockets.”
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The Bank of England has made multiple changes to the base rate over the years
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The pound dropped in value immediately after the Bank of England’s change to the base rate of interest was released
Victor Trokoudes, the founder and CEO of smart money app Plum, previously cited forecasts of further interest rate cuts from the Bank in 2025 but warned a stagnant economy could put call these projections into question.
He explained: “These different interpretations reflect diverging views over future UK economic performance. Some analysts are pessimistic, predicting that continued growth stagnation will necessitate further cuts to help stimulate the economy.
“The recent fall in inflation, in particular services inflation, outlined in December’s reading, opened up this opportunity for the MPC to cut the base rate to boost growth. In turn, they’ll be hoping that inflation continues to stabilise around the two per cent target.”
Following the Bank’s announcement, Governor Andrew Bailey stated: “It will be welcome news that we have been able to cut interest rates again today. We’ll be monitoring the UK economy and global developments very closely and taking a gradual and careful approach to reducing rates further.
“Low and stable inflation is the foundation of a healthy economy and it’s the Bank of England’s job to ensure that.”
Last week, EY Item Club’s Winter Forecast predicted UK gross domestic product (GDP) growth to be around one per cent in 2025, down from the 1.5 per cent estimated in October’s forecast.
According to the financial firm, the slowdown in the economy towards the end of last year is expected to be temporary and steady quarter-on-quarter growth is predicted this year
On top of this, EY projects that consumer spending in the UK will jump by around 1.6 per cent for the year, up from the one per cent reported in 2024.
Anna Anthony, EY UK’s regional managing partner, said: “The outlook for UK business is more of a mixed picture. While business investment is set to increase, tightening financial conditions and global trade uncertainty are expected to weigh on private sector confidence in the first half of this year.
“As economic momentum starts to build, the Government will likely have more opportunities to bolster business confidence and reinforce the UK’s attractiveness as a destination for investment.”
