The Bank of England has significantly lowered its UK growth forecast for 2025 to just 0.75%, a sharp reduction from the 1.5% predicted three months prior. This downward revision signals a potential period of prolonged slow growth, raising concerns about the country’s economic outlook. The Bank’s announcement comes as a blow to the government and highlights the challenges facing the UK economy.
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Economic Contraction and Weakening Activity
The Bank of England’s latest report reveals a 0.1% contraction in the final quarter of 2024, following stagnation in the previous quarter. This economic downturn is attributed to declining business confidence, reduced household spending, and weaker business investment intentions. The Bank acknowledges that both weakened demand and a degree of supply growth constraint contribute to the current GDP weakness.
Inflationary Pressures and the Bank’s Response
Despite the economic slowdown, the Bank of England anticipates a “quite sharp” rise in inflation later this year, driven by increasing costs for essential services like water, energy, and transportation. This projected inflation surge poses a challenge to the Bank’s 2% target. In response to the economic slowdown, the Bank has cut its base interest rate to 4.5%, the lowest in 20 months. This move aims to stimulate economic activity and provide relief to mortgage holders. Chancellor Rachel Reeves welcomed the rate cut but expressed dissatisfaction with the overall growth rate, emphasizing the need for further measures to boost the economy.
Expert Analysis and Future Outlook
Economists and financial experts offer insights into the Bank’s decision and the challenges ahead. Thomas Pugh of RSM UK highlights the “obvious choice” of a rate cut given the economic slowdown but notes the difficulties in navigating rising inflation and potential trade disruptions. Simon Dangoor of Goldman Sachs Asset Management anticipates further rate cuts throughout the year, with an accelerated pace in the latter half. Neil Birrell of Premier Miton Investors underscores the concern over weak economic growth and the potential for stagflation. The Bank of England’s support for growth initiatives, such as the proposed Heathrow expansion, indicates a long-term perspective on economic recovery. However, the immediate impact of such projects is expected to be minimal. The Bank’s Monetary Policy Report also acknowledges the potential negative consequences of tariffs and trade barriers on UK economic activity. The Bank of England’s next meeting to discuss rates is scheduled for March 20th. The economic outlook remains uncertain, with challenges posed by inflation, potential trade disruptions, and sluggish growth.
