The Bank of England expects the inflation to increase from 2.5% to 3.7%, above the 2% target
Rachel Reeves’s growth aspirations faced a double blow when the Bank of England cut its annual growth prediction in half and warned that rising prices would strain households.
Even as the economy slowed down, Threadneedle Street issued a pessimistic assessment. It lowered interest rates for the third time in six months and warned that rising inflation would increase people’s living standards.
The central bank’s sharp drop in its 2025 growth projections showed concern and caused a quarter of a point rate cut to 4.5%. The economy now projects that it will grow only 0.75%, down from 1.5% estimated in November.
‘Stagflation’ is feared as the Bank of England lowered its growth estimate and warned of price increases. Some analysts suggested that the Bank’s projection showed that the UK is heading for ‘stagflation,’ a dangerous combination of high inflation and slow growth.
Business leaders blame the sharp decline of Reeves’ decision to increase employer national insurance contributions by £25 billion. Meanwhile, there are worries about Trump’s tariffs imposed on US allies and adversaries.
Susannah Streeter, head of money and markets at Hargreaves Landsdown, finds there is so much danger in being ‘stagflation.’ Inflation is above the Bank’s 2% target, the economy has stagnated, and businesses are losing confidence.
The Bank’s monetary policy committee (MPC), voted by a majority of seven to two, approved an immediate cut in borrowing prices from 4.75% to 4.5%. The announcement made the City traders place bets that the Bank will make more rate cuts due to the UK’s weak economic outlook.
The Bank’s governor, Andrew Bailey, stated that due to the economy, the Central Bank will lower its interest rates to protect the economy despite facing short-term inflationary pressure.
He added that inflation will cause a bump in the road, but it won’t last forever.
The TUC’s general secretary, Paul Nowak, stated that additional rate cuts are necessary to protect the companies and consumers. The rate cut is desperately needed to help the economy out of stagnation.
The Bank expects the inflation to increase from 2.5% to 3.7%, above the 2% target. It will increase water bills, bus fares, and household energy prices.
Reeves came under fire since government borrowing costs increased due to anticipation of higher for longer rates in the UK and US.
Many warned her that to comply with fiscal rules, she might need to increase taxes or reduce spending.
As investors placed bets on rate cuts, several experts said that since the weak economy, they needed to reduce the government’s borrowing costs.
James Smith, the research director at the Resolution Foundation think tank, suggested looking at the bright side of the Bank’s pessimistic assessment. The MPC needs to quicken the interest rate cuts and lower servicing expenses to give the chancellor much-needed headroom.
Reeves has already hinted that they made cuts in spending to balance the books to books in response to the pessimistic Office for Budget Responsibility (OBR) that could ruin her fiscal rules.
Union leaders encourage the government to prioritize growth-enhancing projects to help retrieve the economy. Sharon Graham, general secretary of the Unite stated that public spending is desperately needed for these projects to stimulate economic growth and create good jobs.
Reeves’ main goal for economic growth is to clear the way for private sector investment in infrastructure, such as the third runway at Heathrow construction.
The Bank applauded the chancellor’s policies, but they have not updated its forecasts since it will take years to bring it to the effort.
Labor commitment to reforms might help boost the business confidence and have a short-term, positive impact on the economy. The Bank stated that it is keeping an eye on US tariffs even though not included in the UK impact recent forecasts.
The Bank’s governor, Andrew Bailey, warned that Britain is not immune to a global trade war. Greater global protectionism would negatively impact the world economy in the medium term and increase trade fragmentation.
The shadow chancellor, Mel Stride, said that reducing the interest rates would be happy news for households and businesses affected by Labour’s mismanagement.
