The Bank of England has cut benchmark rates by 25 basis points to 4.5%, a move anticipated by markets.
The Monetary Policy Committee (MPC) of the Bank of England holds a similar target as the US of achieving a 2% inflation rate. In Q4 2024, the CPI inflation was measured at 2.5% in the UK.
GDP growth has been weaker than expected at the time of the November Monetary Policy Report, and indicators of business and consumer confidence have declined. GDP growth is expected to pick up from the middle of this year. The labour market has continued to ease and is judged to be broadly in balance. Productivity growth has been weaker than previously estimated, and the Committee judges that growth in the supply capacity of the economy has weakened. As a result, the recent slowdown in demand is judged to have led to only a small margin of slack opening up.
In support of returning inflation sustainably to the 2% target, the Bank believes there has been “sufficient progress on disinflation in domestic prices and wages” to lower rates.
Commenting on the rate decision, CEO of Manx Financial Group, Douglas Grant, said the rate cut aligns with the positive news offered by the modest rise in UK GDP. Grant noted that high inflation continues to squeeze costs and consumer spending, exacerbated by geopolitical instability.
“The current challenges facing SMEs are reflected by research from Manx Financial Group, which reveals that nearly a third of UK SMEs have paused or scaled back operations due to financial constraints. Although this marks an improvement from 40% in the previous year, significant hurdles persist. Access to external financing remains a challenge for around 10% of SMEs, highlighting the need for a more stable and inclusive lending environment. With the SME lending landscape rapidly evolving, Labour must urgently recalibrate its policies to better support these essential businesses.”
Grant coached the Labour government to create a stable lending environment as inadequate financing could impact growth.
Gadi Chait, Investment Manager at Xapo Bank, noted that the UK economy continues to struggle, and potential US tariffs may not help.
“This difficult economic period has forced policymakers to navigate a complex environment where weak growth, persistent price pressures, and external trade shocks all play a role,” said Chait. “In response, the decision to cut the UK base rate stands in stark contrast to the US Federal Reserve’s decision to hold rates steady as it battles persistent inflationary pressures. This separation highlights the differing priorities on either side of the Atlantic: the UK leaning toward economic stimulus, while the US remains cautious until inflation and employment data signal a need for further easing.”
Chait said several questions remain, and there are risks and benefits of the different monetary policies between the US and UK.
“And how might differing approaches to digital assets shape the future of global financial markets? These are the issues that will likely define the next phase of policy decisions.”