The Bank of England (BoE) has halved its growth forecast for this year as it cut interest rates to the lowest level for more than 18 months.
The economy is now expected to grow by 0.75% in 2025, the Bank said, down from its previous estimate of 1.5%. The government has made growing the economy one of its key aims.
Prime Minister Sir Keir Starmer said that he wasn’t satisfied with growth and the downgraded forecast would spurs people on. The new forecast came as the Bank cut interest rates to 4.5% from 4.75%, with its governor, Andrew Bailey, saying that rates remain on a downward path.
Mr Bailey said the Bank expected to be able to cut rates further, but he will have to judge, meeting by meeting, how far and how fast. "We live in an uncertain world, and the road ahead will have bumps on it," he added.
After the rates announcement, the pound slumped, before regaining ground. Mr Bailey stressed that the Bank needs to remain "gradual and careful" when continuing to cut rates because "there is a lot more uncertainty" and because of the predicted rise in inflation.
While it cut its growth forecast for this year, the Bank upgraded its predictions for both 2026 and 2027. The economy is now expected to grow by 1.5% in both of those years, the Bank said, up from 1.25%.
However, it also predicted that higher energy and water bills would push up inflation sharply later this year and warned that there were a number of factors that could affect inflation including possible trade tariffs in the US. Inflation - the rate at which prices rise - is now expected to rise to 3.7% and take until the end of 2027 to fall back to its 2% target.
Last week, Chancellor Rachel Reeves announced a number of measures to try to boost the UK economy. However, her decision in last year's Budget to increase employers' National Insurance contributions from April has led to a wave of criticism from businesses, who argue it will push up prices and hit investment and jobs.
Mr Bailey said the impact of the Budget, particularly the looming higher costs of employing people, was feeding through into lower confidence for businesses and households. "There's no question that the increase in the cost of employment does have an effect," he said.
"We're very focused on how that increased cost of employment is going to pass through." Sir Keir said the government would turn the economy around with a focus on "build baby build" and by making "tough decisions whether on planning, on infrastructure, on nuclear".
Shadow chancellor Mel Stride said while the rate cut would be good news for many families and businesses, the government's "disastrous Budget" was likely to mean fewer rate cuts this year than expected. Paul Johnson, director of the Institute for Fiscal Studies think tank, said it was "very worrying" for the government that the Bank of England has "really, quite significantly" downgraded its forecasts for economic growth.
He added that if the official government forecaster - the Office for Budget Responsibility - changes its forecast in line with the Bank's then "the chancellor is in big trouble" when it comes to meeting her self-imposed debt rules. He went on: "That means... the tax revenues the chancellor is relying on are unlikely to come in as expected, and even tougher choices on spending and tax going forward."
The interest rate cut means that for the 629,000 homeowners on mortgage tracker deals that move in line with the base rate, there will typically be a £29 fall in monthly repayments. The near 700,000 people on standard variable rate mortgages will have to wait to see if their lender responds.
Those on a fixed mortgage deal will see no immediate change, but there might be cheaper deals available for new and renewing customers. However, the rate cut is likely to lead to lower returns for savers.
In its quarterly inflation report, the Bank said economic growth had been "broadly flat since March last year", as the UK economy showed zero growth between July and September.
For the following three months, the Bank of England now expects it to shrink by 0.1% against a previous forecast of 0.3% growth. A recession is defined as two consecutive three-month periods of economic contraction.
The Bank now expects the economy to grow by just 0.1% between January and March, down from the 0.3% it had predicted in November. Following the Bank of England’s interest rates decision, and a 0.25% cut to the base rate, Alpa Bhakta, CEO of Butterfield Mortgages Limited, said: “With Monetary Policy Committee decisions being the most significant driver of market sentiment, today’s rate cut should precede more activity as borrowing cost becomes lower. That said, challenges remain, and as lenders we must continue to provide flexible solutions and bespoke support to ensure brokers and property investors are well-positioned to thrive as the economic outlook improves.”
Paresh Raja, CEO of Market Financial Solutions, said: "The decision was widely expected, and there’s been plenty of evidence of lenders changing their rates over recent weeks ahead of the base rate being cut. But it is another positive step nonetheless, and it will likely bring more buyers into the market.
"As ever, no sooner has the Bank of England delivered one decision than speculation begins about when it might cut the base rate again. The forecasts still suggest there could be anything between one and three further drops this year, but such predictions are sensitive to other trends, such as the performance of the economy and the rate of inflation.
“For now, the focus from lenders and brokers has to be on taking a pragmatic, responsive approach, ensuring they support borrowers as best they can, particularly if a wave of new prospective buyers and investors does enter the market."
With the assumed a 0.25% cut (with the usual caveat in case the BoE surprises us), please find below comments from My Pension Expert’s Policy Director, Lily Megson, said: “This was an eagerly anticipated decision, and a cut to the base rate will no doubt be celebrated as good news.
“But we’ve been here before, and if last year taught us anything, it’s that fleeting economic shifts cannot overshadow the need for long-term financial planning. For many Britons, a lower cost of borrowing is positive, but the flip side is that lower interest rates will mean challenges for savers, especially those nearing retirement.
“Indeed, we should expect many retirement planners to now question whether their strategy and financial products still serve their interests. However, without reliable support, these questions can be hard for people to answer.
“That’s where the government must step in and do much, much more. We’ve heard plenty of rhetoric about pension reforms designed to both boost the economy and provide better outcomes for savers.
“But now is the time for decisive action – the government has to turn promises into policy, with a particular focus on improving access to financial education and independent advice. Only then will all retirement planners be able to make informed financial decisions and navigate events like today's base rate cut with greater confidence.”
