The Bank of England has maintained interest rates at 3.75% while significantly downgrading its economic growth forecast from 1.2% to just 0.9% for this year. This sharp revision reflects growing concerns about the UK’s economic momentum.
The monetary policy committee’s 5-4 vote to hold rates came despite this weaker growth outlook, with four members believing the downgrade already justified immediate easing. The close division suggests that growth concerns are weighing heavily on policymakers’ minds, though they disagree on whether to act immediately.
The downgrade from 1.2% to 0.9% represents a substantial reduction in expected economic activity, particularly as it occurred over just a three-month period between forecasts. The Bank attributes some of this weakness to higher employer costs from increased national insurance contributions and the rising minimum wage, which have contributed to flat employment growth.
Governor Andrew Bailey acknowledged the weaker growth outlook but focused primarily on the improving inflation picture in his remarks. He projected that inflation would fall to around 2% by spring and suggested that conditions should allow for rate cuts during the year to support growth. However, he emphasized that ensuring sustainable low inflation remains the priority.
The unemployment rate is now expected to reach 5.3% this year, up from the 5% previously forecast, reflecting the challenging labor market conditions implied by the lower growth forecast. Meanwhile, Chancellor Rachel Reeves’s budget measures, including utility bill cuts and rail fare freezes from April, are projected to drive inflation down to 2.1% by mid-2026, compared to 3.4% in December. The combination of weak growth and falling inflation creates a strong case for monetary easing, though the committee remains divided on timing.