In the last couple of weeks, the Bank of England cut interest rates from 4.5% to 4.25%, and a new ‘trade deal’ was announced between the UK and the US. Let’s see what these news items can tell us about the latest developments in the economy.
Split Opinions
At its meeting to discuss the Bank Base Rate, the Monetary Policy Committee (MPC) voted by a majority of 5-4 to reduce it to 4.25%. Two of the opposing members voted for reducing the rate to 4.0%, while the remaining two voted for keeping the rate at 4.5%.
This represents a wide range of opinion, which is perhaps to be expected given the uncertainty both domestically and globally in recent months. It could suggest that your guess is as good as ours on what direction the economy will take in the coming months.
Inflation and Growth
At 2.6% in March, inflation is still above the Bank’s target of 2%. It was, however, a reduction from 2.8% in February and so is a step in the right direction.
Most tellingly, though, the MPC noted that this was close to their expectations in February. Perhaps this gives them added confidence in their predictions of how inflation is going to develop over the medium term.
The Bank believes that inflation will increase to 3.5% between July and September because of energy costs. However, the committee believes that inflation will fall back after that.
The latest growth figures showed 0.7% growth in the January-to-March period, stronger than the 0.6% that had been forecast. Critics point out that the period excludes the effects of the Chancellor's increase in employers' National Insurance Contributions.
This may mean that we should not expect big cuts to the base rate in the rest of 2025.