Latest UK Interest Rate Decision: Dilemma and Economic Outlook

By TrendForce

2025-02-07

Table of Contents

The Bank of England (BoE) announced a 25-basis-point rate cut to 4.50% during its monetary policy meeting on February 6. In addition to maintaining a "gradual" approach to future policy adjustments, this statement indicated a more cautious stance moving forward.

The market broadly anticipated a 25-basis-point rate cut in this meeting. However, as internal divisions among committee members on economic prospects and inflation pressures persisted, the final vote unexpectedly passed with a 7-2 majority in favor of a 25-basis-point cut, with two members supporting a 50-basis-point cut.

Statement

In the statement, the BoE noted that the decline in inflation was largely driven by past reductions in energy costs, and wage growth's impact on price levels had weakened. Additionally, the current restrictive stance of monetary policy has played a role in stabilizing long-term inflation expectations. As a result, adopting a gradual and cautious pace of rate cuts is deemed an appropriate strategy.

Economic Outlook

The BoE highlighted that the economic performance in Q4 2024 was slightly weaker than previous expectations, with signs of deteriorating business and consumer confidence. Although the labor market has softened, weaker productivity growth has constrained supply, limiting the short-term capacity expansion of the UK economy. Consequently, the BoE revised down its 2025 GDP growth forecast to 0.75% (previously 1.5%) and adjusted the 2026-2027 forecast to 1.25% (previously 1.5%).

Inflation Outlook

As the negative contribution of energy prices to overall inflation continues to fade, and the Office of Gas and Electricity Markets (Ofgem) is expected to raise the household energy price cap again in April 2025, the BoE has significantly raised its inflation forecast for 2025 to 3.5% (previously 2.7%), with Q3 inflation projected to surge to 3.7% (previously 2.8%). However, as wage growth pressures and service price expectations gradually weaken in the future, the BoE expects inflation to continue declining to 2.5% (previously 2.25%) in 2026-2027 and eventually reach its long-term target of 2.0% (previously 1.75%).

Impact of U.S. Tariff Policy

Regarding the U.S. tariff policy, as the overall policy framework remains unclear, the BoE did not incorporate explicit economic assumptions related to tariffs. However, it did discuss potential impacts. In 2023, UK exports to the U.S. accounted for approximately 22% of total exports and about 7% of GDP. Although 70% of these exports were services—which would not be directly affected by goods tariffs—there remains a possibility of service tariffs being imposed in the future. Additionally, tariffs imposed on other countries could lead to a decline in imports of UK services. Thus, the potential impact of tariff policies on both the economy and inflation should not be overlooked.

(The potential effects of trade tariffs on the UK, Source: Bank of England)

Overall, the BoE’s policy direction reflects a significant dilemma between "economic slowdown" and "upside inflation risks." While two committee members supported an immediate 50-basis-point cut, the majority favored a more gradual and measured 25-basis-point reduction. Barring major economic shocks, the likelihood of the BoE embarking on an aggressive rate-cutting cycle remains low. According to interest rate futures data, markets currently expect the BoE to implement an additional 75 basis points of rate cuts throughout the year.

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GDP Inflation United Kingdom

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