Bank of England Cuts Rates Amid Higher Inflation and Weaker Growth

The Bank of England (BoE) has announced a quarter-point cut in its main interest rate, reducing it to 4.5% in an effort to stimulate the slowing British economy. Despite inflation remaining above the 2% target, the BoE's decision reflects concerns about the economy's stagnant growth and the potential impact of global trade wars on the UK. This article explores the factors driving the BoE's decision, its economic projections, and the implications for investors in the UK and global markets.

Weak Economic Growth and Inflation Expectations

The British economy has barely grown over the past six months, with GDP registering no growth in the third quarter of 2024 and a downward revision to 0.5% in the second quarter. The BoE expects zero GDP growth in the last quarter of 2024, downgrading the previous estimate of 0.3% (Reuters, 2025). This stagnant growth puts downward pressure on inflation and necessitates a rate cut to support the economy.

Although inflation is still above the 2% target, it has been decreasing and is expected to trend lower in the coming months. The annual headline inflation rate slowed to 2.5% in December 2024, surprising analysts who had expected it to hold steady or inch up slightly (Reuters, 2025). The BoE expects inflation to peak at around 3.7% in the third quarter of 2025 before falling back to its 2% target by the end of 2027 (Bank of England, 2025).

Global Economic Uncertainty and Employment Concerns

The burgeoning tariff trade war between the US and China, the world's two largest economies, poses further risks to growth. The MPC is likely to consider the potential impact of these tariffs on the UK economy and global economic uncertainty when making its decision (XTB, 2025). Additionally, a closely watched survey showed that last month jobs in the UK's dominant services sector were being lost at the fastest pace in four years (The Telegraph, 2025). This softening in the labor market may influence the MPC's decision to cut interest rates to support economic growth.

Implications for Investors

The Bank of England's assessment of the UK economy's potential growth rate and the likelihood of additional rate cuts significantly impacts investors' decisions in the UK and global markets. A downward revision in the growth rate, as expected in the upcoming meeting, could lead to a more cautious approach by investors, potentially impacting stock prices and bond yields. The likelihood of additional rate cuts affects investors' expectations about future interest rates, potentially leading to increased demand for UK government bonds (Gilts) and other fixed-income securities.

The BoE's decision and guidance can also impact the value of the British Pound (GBP) in global markets. A dovish stance and a higher likelihood of rate cuts could lead to a weaker GBP, making UK exports more competitive internationally but potentially increasing import costs. Conversely, a more hawkish stance could strengthen the GBP, making imports cheaper but potentially hurting UK exports.

In conclusion, the Bank of England's decision to cut interest rates, despite inflation remaining above target, is driven by concerns about weak economic growth and the potential impact of global trade wars on the UK. The BoE's economic projections indicate a need for a more accommodative monetary policy to support the slowing economy. Investors should consider the implications of the BoE's decision on their portfolios, adjusting their expectations for future interest rates, currency values, and global market interactions.