Bank of England Cuts Interest Rates – What It Means for the UK Economy

Important update for A-Level and IB Students! The Bank of England has just announced a major decision—cutting the base interest rate to 4.5%!

Key Economic Themes in the Report

The Monetary Policy Report – February 2025 by the Bank of England presents an in-depth assessment of economic conditions in the UK, focusing on inflation, interest rates, monetary policy stance, and macroeconomic risks. Below are some of the critical economic takeaways:

1. Inflation Trends and Outlook: CPI inflation had declined significantly from its peak of 11% in late 2022 to around 2.5% in December 2024​. However, inflation is expected to rise again to 3.7% in Q3 2025, driven by increasing global energy prices and regulated cost changes.
2. Interest Rates and Mortgage Markets: Interest rates have started to decrease slightly after reaching a peak in mid-2021. A significant portion of UK mortgages are on fixed rates, meaning many households have yet to experience the full effect of previous rate hikes​. This delay in rate pass-through affects consumption patterns and housing affordability.
3. Labour Market and Wage Growth: While the labour market remains relatively balanced, wage growth has been stronger than anticipated, with private sector wages growing at 6.0% in late 2024​. The interaction of higher employer National Insurance contributions (NICs) and rising National Living Wage (NLW) could further affect employment costs and consumer prices​.
4. Fiscal Policy and Government Interventions: Measures from the Autumn Budget 2024 are expected to boost GDP by approximately ¾% at their peak but will also add around 0.5 percentage points to inflation due to increased government spending​.
5. External Risks and Trade Policy Uncertainty: The appreciation of the US dollar and recent global trade tensions have introduced uncertainties in exchange rates and financial markets, affecting UK export competitiveness​