Professor Joe Nellis.
Joe Nellis, economic adviser at accountancy and advisory firm MHA and Professor of Global Economics at Cranfield School of Management, reflects on the Bank of England’s decision yesterday (Thursday) to reduce UK interest rates by 0.25%.
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THE BANK of England’s decision to cut interest rates to 4.5% comes in response to the ongoing weakness of the flatlining UK economy although for many on the Monetary Policy Committee, it would have been a tough decision to balance.
On the whole, the MPC will have decided that the need for economic growth overrides the concerns of creeping inflation… for now.
This brings UK interest rates down by 0.75% from its peak of 5.25%, in line with the USA but comfortably above the Eurozone’s rate of 2.75%.
Yet the US Federal Reserve and the European Central Bank have been cutting far more aggressively – by 1% and 1.25% respectively since June 2024.
The caution of the BoE reflects the awareness of policymakers that the inflationary landscape may not be as rosy as it was when it set out on its rate-cutting programme in late summer.
This derives from several concerns, most notably surrounding global economic uncertainty. The election of President Trump has exacerbated this ambiguity, with the threat of tariff wars leading to a widespread increase in the price of imported goods and subsequent global inflation a key concern.
There are also domestic worries holding the BoE back. The introduction of increased employer NICs and an elevated minimum wage in April is fast approaching. This comes at a time when average earnings are continuing to rise, with year-on-year growth reaching 5.6% in November, its highest level since May.
With these inflationary concerns looming in the background, the BoE has made a calculated gamble. If they can reignite the economy without causing an inflationary fire, this gamble will have paid off.
Rate cut ‘too little, too late’ for stagnant economy
Julian Jessop, Economics Fellow at the free market think tank the Institute of Economic Affairs, adds his viewpoint.
The Bank of England’s decision to cut interest rates was welcome but overshadowed by a gloomy set of forecasts. The Bank has been forced to cut because the UK economy is crashing.
The Bank now expects GDP to stagnate in the short term and to grow by just 0.75% in 2025 as a whole at half the pace predicted as recently as November last year.
Moreover, headline inflation is now expected to rise as high as 3.7% later in the year. This seems too pessimistic, given the weakness of money growth and the slump in the real economy.
But at least the MPC has shown it is willing to look past the temporary effect of higher energy costs and focus on underlying price pressures.
The Bank will probably continue lowering rates gradually but rates will remain ‘restrictive’, meaning that they will still hold back growth. It would have been better to cut by at least 0.5%, as recommended by the IEA’s shadow Monetary Policy Committee and by two members of the real MPC.
“Remember also that the Office for Budget Responsibility had already factored in another 1% of cuts over the next year or so (to 3.5%) in the October Budget. Rate cuts along these lines will not therefore improve the forecasts for the public finances.
“Overall, it is good news that rates have been cut, and they will almost certainly be cut further over the course of 2025.
But the key driver is the worsening economic outlook, with growth stagnating and inflation expected to pick up sharply. Again, the MPC appears to be doing too little, too late.”
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