Bank of England set to lower interest rates amid UK economic uncertainty

LONDON: The Bank of England is preparing to reduce interest rates and revise its economic growth forecasts, highlighting the challenges facing Rachel Reeves’s budget plans

With inflation on a downward trend, the monetary policy committee (MPC), composed of nine members, is widely anticipated to cut rates by a quarter point to 4.5 percent, marking the lowest level since June 2023, reported the Guardian.

Alongside this decision, the Bank is set to release its quarterly economic outlook, with experts predicting a reduction in its GDP growth projection for 2025 from 1.5 percent to roughly 1 percent. Morgan Stanley has forecasted that UK economic growth will fall below 1% during the same timeframe, despite the Bank’s more optimistic estimate.

James Smith from ING noted that a downgraded growth forecast from the Bank would spotlight the Office for Budget Responsibility, the entity that oversees the government’s fiscal policy. The OBR’s updated growth forecast recently reached Reeves at the Treasury and will play a pivotal role in determining if she can adhere to her self-imposed fiscal targets.

“At the time of the October budget, the OBR projected a growth rate of 2 percent for this year, which seemed optimistic then and appears even more unrealistic now,” Smith remarked. Should the OBR’s updated projections indicate that the chancellor is on track to exceed her fiscal guidelines, Reeves is likely to announce spending cuts when she addresses Members of Parliament on March 26.

Also read: Pound plummets to nine-month low amid rising UK borrowing costs

Originally, her address was intended to be a brief economic update; however, recent fluctuations in government bond markets could threaten the £9.9 billion leeway the chancellor had allocated to meet her targets, prompting government sources to suggest she may need to outline spending reductions.

Earlier this month at a Davos conference, Reeves stated, “We’ve tasked the independent Office of Budget Responsibility with producing a forecast, which will be published on March 26, at which point I’ll detail any necessary changes.”

Darren Jones, the chief secretary to the Treasury, has consistently emphasized that Reeves’s fiscal rules are “non-negotiable.”

On a more positive note for Reeves, the yield on 10-year government bonds, known as gilts, dropped to around 4.42 percent on Wednesday, the lowest since December 16, as markets anticipated lower interest rates. Reducing borrowing costs is expected to be the first of several quarter-point cuts this year, with Simon French, chief economist at Panmure Liberum, predicting as many as six reductions in 2025. However, he cautioned that the Bank would likely wait for political stability before accelerating its pace of rate cuts.