The Bank of England Monetary Policy Committee (MPC) voted by a majority of 7-2 to cut the Bank Rate by 25 basis points to 4.5%; interestingly, the two dissenters voted for a larger cut of 50 basis points. This was widely expected and rather more headlines will be written about the Bank downgrading its forecast for UK GDP growth to just +0.75% for 2025 (from +1.5%).
The interest rate decision matches the one made last week by the European Central Bank (ECB), while the US Federal Reserve held its rates at its most recent meeting (also last week). The consensus is that there will probably only be one rate cut in the US this year (despite the wishes of the new President) given the strength of growth in the US economy that is likely to be boosted in the short-term by tax cuts; any inflationary or activity impact from increased tariffs will take longer to come through. For Europe, the ECB has been cutting more aggressively with five reductions since last June and although this pace will probably slow, further rate decreases are likely this year.
For the UK, the Bank had to balance a clear need to help boost the economy by cutting rates against their target of keeping inflation at +2% ±1% in two years’ time. The report from the MPC and the Governor’s press conference revealed that they expect the increase in the Consumer Price Index to reach +3.7% later this year and that it will take until 2027 to get back to the target rate. This is driven by higher energy prices and some concern about the impact on prices from the increase in both Employers NICs and the Minimum Wage.
The core message from the MPC was that it expects a “gradual and careful” loosening of policy, but heightened uncertainty means a wide range of outcomes are possible. Despite mixed signals from the Monetary Policy Report, our colleagues at Oxford Economics still expect three more cuts in the Bank Rate during 2025; this is driven by the need to improve the weak level of growth taking precedence over the rate of inflation. There was a distinct lack of forward guidance from the MPC minute this time; this reflects a relatively wide range of views on the Committee and a high degree of uncertainty around the outlook.
This report includes an update on business conditions by the Bank’s local Agents based on information gathered in the 6 weeks to early-January. For manufacturers, they indicate that investment intentions have become more muted with a number of factors, including the recent budget changes, leading to companies adopting a “wait-and-see” attitude.
Exports of goods remain weak, with the report noting that UK producers are facing rising competition from China in 3rd country markets overseas. The construction and chemicals sectors are also weak but the report notes that the defence, marine and aerospace sectors continue to report strong growth.
The Agents also highlight that manufacturers’ volumes were slightly lower at the end of 2024 than a year ago and expectations for Q1-2025 have weakened. Their contacts have mixed views about the outlook for 2025, with many now expecting that volume growth will be lower than previously hoped and take longer to emerge.
Again, defence and aerospace are mentioned as relatively bright spots in the manufacturing landscape while automotive output is lower because of weaker demand and some retooling for electric vehicle production. Capital goods and construction-facing output remains subdued.
You can access the Monetary Policy Report on the Bank of England website at https://www.bankofengland.co.uk/monetary-policy-report/2025/february-2025; by scrolling down to the report section of this page, you can use the side menu to jump to the section on the Agents’ update on business conditions. The minutes of the MPC meeting are published at https://www.bankofengland.co.uk/monetary-policy-summary-and-minutes/2025/february-2025.