The Bank of England reduces interest rates and signals that further cuts might be forthcoming.

The Bank of England has lowered UK interest rates to 4.5%, marking the lowest level since June 2023.

Economists had anticipated the cut, which was intended mainly to relieve some of the financial strain on borrowers and potentially spur economic growth. This marks the third reduction in UK borrowing costs during the current cycle, following previous cuts in August and November last year.

The Monetary Policy Committee approved the rate cut by a 7-2 vote, prompted by December’s drop in inflation to 2.5%, closer to the Bank’s 2% target.

MPC members Catherine Mann and Swati Dhingra advocated for a more significant cut of half a percentage point to 4.25%, warning that signs of a faster-than-expected economic slowdown were emerging.

Announcing the decision, the Bank says:

There has been substantial progress on disinflation over the past two years, as previous external shocks have receded, and as the restrictive stance of monetary policy has curbed second-round effects and stabilized longer-term inflation expectations.

That progress has allowed the MPC to gradually withdraw some degree of policy restraint, while maintaining Bank Rate in restrictive territory so as to continue to squeeze out persistent inflationary pressures.

The pound fell 1% against the dollar as traders increased their bets on further interest rate cuts, expecting three more reductions before the year ends.

Bank officials now project the economy will grow by just 0.75% this year—a significant downgrade from the 1.5% forecast made three months ago.

The latest economic outlook warned of a stagnating economy, higher inflation, and rising unemployment, particularly in light of a £40bn tax hike that is expected to impact low-paid workers the most.

The Governor of the Bank of England stated that policymakers will adopt a “gradual and careful approach” to any further interest rate cuts.

Andrew Bailey remarked, “It will be welcome news to many that we have been able to cut interest rates again today. We’ll be closely monitoring the UK economy as well as global developments, and will proceed with further rate reductions in a cautious and measured manner. Low and stable inflation is the cornerstone of a healthy economy, and ensuring that is the Bank of England’s primary responsibility.”