Is this the start of a run of cuts?
The Bank of England reduced their base rate to 4.5% last month, as had been widely expected in the days leading up to the decision.
The decision was made by a 7-2 majority. The minority of two members were looking for the rate to be reduced to 4.25%.
Could this suggest a run throughout 2025 of rate cuts? Let’s have a look at some of the factors involved.
Inflation forecasts
The Consumer Price Index (CPI) was 2.5% for the last quarter of 2024 and these were the latest official figures available prior to the Bank’s decision.
However, figures for January 2025 that were released later in the month show that inflation increased to 3.0%. This was a surprising jump, largely prompted by transport and food and non-alcoholic beverages costs.
Interestingly, the Bank had already said they expected CPI inflation to increase to 3.7% by autumn 2025 due to higher global energy costs and regulated price changes. However, it seems unlikely they were expecting it to climb so soon.
Looking at the longer term, the Bank’s view at the time they made their decision is that pressures on inflation at a domestic level are moderating and will wane further as 2025 progresses. So, they expect CPI inflation to fall back to 2% from the end of 2025.
Whether this view will be modified by the latest inflation figures is unknown yet.
Growth forecasts
The Bank expects GDP growth to pick up from the middle of this year. They believe that the economy’s ability to produce goods and services has grown more slowly than previously estimated.
So, while they’ve noted a slowdown in demand, they judge that only a small amount of unused capacity has been created in the economy. Their view on this allowed them to cut the rate to 4.5%
Will there be future rate cuts?
Looking forward to future potential rate cuts, the Bank has said “a gradual and careful approach to the further withdrawal of monetary policy restraint is appropriate.” They stressed that there are ongoing uncertainties around demand and supply in the economy.
Their approach is likely to be even more cautious if the January 2025 inflation figures suggest an unexpected shift in the economy.
Looking at the global economic picture, the Bank have also highlighted the global economic uncertainty and a pickup in financial market volatility due to the recent announcements in the US on trade tariffs and subsequent retaliatory measures.
As it becomes clearer how these issues are developing, we may see adjustments to the Bank’s view of how the UK economy will be affected.
For the time being it seems the only certainty is uncertainty!
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