The Bank of England has warned that UK inflation will rise sharply later this year due to increasing water and energy bills. This comes as the Bank reduced interest rates from 4.75% to 4.5%, as expected, but cautioned that inflation will take longer to return to its 2% target.
In a further blow to the UK economy, the Bank also slashed its growth forecast for 2025 from 1.5% to just 0.75%, though it predicts the country will narrowly avoid a recession.
Inflation Pressures Threaten Economic Recovery
The UK government has made economic growth a priority, with the Chancellor recently unveiling measures aimed at boosting performance. However, rising household bills and slower-than-expected growth could complicate efforts to stabilize the economy.
The Bank now forecasts inflation to peak at 3.7% later this year before gradually declining. However, it now expects inflation to reach its 2% target no earlier than late 2027, rather than earlier that year as previously predicted.
Cautious Approach to Future Interest Rate Cuts
Despite the interest rate cut, the Bank of England signaled that future reductions would be gradual, citing global economic uncertainties, including potential trade tariffs from the US.
“We’ll be monitoring the UK economy and global developments closely, taking a careful approach to further rate cuts,” said Bank of England Governor Andrew Bailey.
He emphasized that low and stable inflation is essential for a healthy economy and reaffirmed the Bank’s commitment to ensuring price stability.
Chancellor Calls for Faster Economic Growth
Chancellor Rachel Reeves welcomed the interest rate cut but expressed concern over the UK’s sluggish growth.
“While the rate cut is welcome news, I am still not satisfied with the growth rate. Our Plan for Change aims to go further and faster to jumpstart economic growth and put more money in working people’s pockets,” she stated.
UK Economy Remains Stagnant
According to the Bank of England’s quarterly inflation report, the UK economy has remained broadly flat since March last year.
• Between July and September, economic growth was 0%
• The Bank now expects the economy to shrink by 0.1% in the following quarter, revising its earlier 0.3% growth forecast
• A recession—defined as two consecutive quarters of economic contraction—may be narrowly avoided
• The Bank predicts just 0.1% growth for the first quarter of 2025, down from a previous 0.3% estimate
The latest official GDP figures for the UK economy will be published next Thursday, offering more insight into whether the country is on track for a recovery.
