BoE cuts interest rates to 4.5%

The Bank of England (BoE) has voted to cut interest rates from 4.75% to 4.5%, the lowest level since June 2023, but warned that GDP growth has been “weaker than expected”.

At its meeting this week, the bank’s monetary policy committee voted by a majority of 7–2 to reduce the rate by 0.25 percentage points. Two members preferred to reduce it by 0.5 percentage points, to 4.25%.

It comes as inflation unexpectedly fell one percentage point to 2.5% in December, falling for the first time in three months, in a move that raised expectations of a rate cut this month.

The fall came as hotel prices fell and tobacco costs eased, which were credited with helping offset a jump in the cost of fuel, alongside a slowing in clothing and footwear inflation. 

While December’s rate of inflation still remained above the Bank of England’s 2% target, analysts had expected it to remain unchanged at 2.6%. 

The bank today said that 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 stabilised longer-term inflation expectations”.

Elsewhere, it warned that GDP growth had been “weaker than expected” at the time of its November report, adding that business and consumer confidence have fallen. However, it said growth is expected to pick back up in the middle of the year. 

As such, it said that based on the committee’s evolving view of the medium-term outlook for inflation, a “gradual and careful approach” to the further withdrawal of monetary policy restraint is appropriate.

The bank had previously held interest rates at 4.75% in December after inflation rose for the second month in a row to 2.6% in November, marking the highest level of inflation in eight months. 

In November, the BoE had also voted to cut interest rates, with rates cut to 4.75%, down from a previous rate of 5%. 

It had previously decided to hold interest rates at 5% in September, having lowered them for the first time in four years in August.