In a move widely anticipated by markets, the Bank of England has lowered its benchmark interest rate by 25bps to 4.5%, acknowledging a deteriorating economic landscape while walking a fine line between encouraging growth and keeping inflation in check. The decision underscores a growing sense of urgency among policymakers, who find themselves trapped in a complex scenario marked by flagging domestic growth, persistent price pressures, and volatile global financial conditions. Yet, the Monetary Policy Committee was not entirely united on the size of the cut, as while the majority backed the 25bps reduction, a vocal minority pushed for a more aggressive 50bps cut, citing the urgent need to reignite stalled economic momentum.

Governor Andrew Bailey defended the Bank’s measured approach, stressing that monetary policy adjustments must strike a careful balance in an environment where domestic vulnerabilities, such as heightened political and fiscal uncertainty, exacerbate external risks. The Bank’s caution comes as headline inflation has receded from its double-digit highs in 2023 but still remains elevated at 2.5%. Complicating matters further, core inflation indicators suggest underlying price pressures will persist, with projections now pointing to a potential peak of 3.7% by late 2025. Meanwhile, growth has barely registered in recent quarters, with GDP expected to shrink by 0.1% in Q4 2024, a stark warning that recession risks are still present.

Today’s rate cut may signal the start of a new phase in the Bank of England’s monetary policy cycle, one characterised by cautious easing after nearly two years of relentless tightening. However, global pressures and Sterling’s continued weakness present a continued headache for policymakers, made more precarious by a combination of sluggish productivity growth and elevated underlying costs. Consequently, the Bank’s next steps will be closely watched as markets look for signs of resilience in the UK economy’s capacity to withstand ongoing pressures and global instability.