This article is from the source 'guardian' and was first published or seen on . The next check for changes will be

You can find the current article at its original source at https://www.theguardian.com/business/2025/feb/06/unambiguously-bleak-bank-of-england-forecasts-lay-way-for-spending-cuts

The article has changed 3 times. There is an RSS feed of changes available.

Version 1 Version 2
Unambiguously bleak Bank of England forecasts pave way for spending cuts Rate cut can lift mood but Bank’s forecasts are unambiguously bleak
(about 5 hours later)
Weak jobs market and above-target inflation will dent Reeves’s growth plans and may wipe out fiscal headroomWeak jobs market and above-target inflation will dent Reeves’s growth plans and may wipe out fiscal headroom
With the public finances tight and Rachel Reeves having pledged to balance the books, interest rate cuts are one of the few levers that could boost the UK’s economic growth in the short term, and the chancellor will be glad of the Bank of England’s quarter-point reduction on Thursday – and the clear signal that it is now in cutting mode. Keir Starmer said Thursday’s quarter-point rate cut from the Bank of England would be welcomed by many voters who would see “more money in their pockets”. The prime minister is right, at least when it comes to borrowers on floating-rate mortgages, and Labour will be glad the nine-member monetary policy committee (MPC) has signalled clearly it is in cutting mode.
Seven of the monetary policy committee’s (MPC) nine members backed the quarter-point drop, taking the Bank’s policy rate to 4.5%, while two wanted to be more “activist”, proposing a half-point cut. The Bank of England’s governor, Andrew Bailey, said the MPC would be “taking a gradual and careful approach to reducing rates further”. The Bank’s governor, Andrew Bailey, said the MPC would be “taking a gradual and careful approach to reducing rates further” – and the fact that two of the MPC’s nine members wanted a larger, half-point cut signals more to come.
Lower borrowing costs should feed through fairly rapidly to firms and households, compared with the impact from the runways, power stations and bridges that form the heart of the chancellor’s “plan for growth”. And against the right economic backdrop, rate cuts can act as a short-term mood-booster. Lower borrowing costs can feed through fairly rapidly to firms and households, compared with the impact from the runways, power stations and bridges that form the heart of Rachel Reeves’s “plan for growth”. And against the right economic backdrop, rate cuts can act as a short-term mood-booster.
Yet the picture of the UK painted by the Bank’s quarterly inflation report, published alongside the 7-2 rate decision, is unambiguously bleak. Yet the reason policymakers felt free to push the button on the third rate cut since last summer was that the outlook for economic growth is so gloomy. The picture painted by the Bank’s quarterly inflation report, published alongside the rate decision, is unambiguously bleak.
The MPC has halved its forecast for GDP growth in 2025, from the 1.5% it was predicting in November, to a sickly 0.75%. Economic output is expected to have contracted by 0.1% in the final three months of 2024 and expanded by just 0.1% in the current three-month period – narrowly skirting a recession, defined as two successive quarters of decline. Productivity, the Bank suggests – which Reeves badly wants to improve – has declined. The MPC has halved its forecast for GDP growth in 2025, from the 1.5% it was predicting in November to a sickly 0.75%. Economic output is expected to have contracted by 0.1% in the final three months of 2024 and expanded by just 0.1% in the current three-month period – narrowly skirting a recession, defined as two successive quarters of decline. The Bank suggests productivity, which Reeves badly wants to improve, has declined.
That assessment suggests a sharp downgrade by the Office for Budget Responsibility (OBR) when new forecasts are published on 26 March, from the 1.9% GDP growth it was predicting in October – potentially wiping out Reeves’s room for fiscal manoeuvre and prompting fresh spending cuts. And the MPC’s gloomy prognosis has not even factored in the potential downsides of Donald Trump’s trade tariffs, which it still regards as too uncertain to compute. If the independent Office for Budget Responsibility (OBR) takes a similar view, it could make a sharp downgrade to its growth forecasts when these are published on 26 March, from the 1.9% it was predicting in October.
Even as economic growth bumps along the bottom, though, the MPC expects inflation to come surging back, driven by rising global energy prices, aided by increases in water bills and bus fares. Whether that wipes out Reeves’s room for manoeuvre against her fiscal rules depends on how the OBR assesses the longer-term outlook. Market expectations of lower rates in the UK may bear down on the government’s cost of borrowing, helping to offset some of the impact on the public finances from weaker growth.
By the end of the summer, the Bank is forecasting inflation of 3.7% – well short of the 11% peak after the Covid pandemic and Russia’s invasion of Ukraine, but significantly above the Bank’s target. This uncomfortable combination of weak growth and higher prices, will inevitably lead to claims that the UK is sliding towards “stagflation”. But the MPC’s gloomy prognosis sits in stark contrast to Reeves’s determinedly upbeat messaging on growth in recent weeks, including in last week’s speech.
So what is the reason the Bank’s policymakers still feel able to cut rates, despite this jump in the pace of price rises? They believe the jobs market has now weakened so much that workers will be unable to bid up their pay to compensate, creating the kind of “wage-price spiral” that central bankers dread. With her pledge to sweep away obstacles to investment, Reeves is battling to repair business and consumer confidence, after spending much of the government’s first six months in power pointing to the Tories’ parlous economic legacy.
The MPC does not expect the economy to begin bouncing back until later in 2025, and Bailey stressed it had not even factored in the potential downsides of Donald Trump’s trade tariffs, which are still regarded as too uncertain to compute.
Even as economic growth bumps along the bottom, though, the Bank expects inflation to come surging back, driven by rising global energy prices and aided by increases in water bills and bus fares.
Sign up to Business TodaySign up to Business Today
Get set for the working day – we'll point you to all the business news and analysis you need every morningGet set for the working day – we'll point you to all the business news and analysis you need every morning
after newsletter promotionafter newsletter promotion
That may be reassuring for policymakers, but for the UK’s downbeat consumers, it is likely to mean another bleak year of stagnant living standards. The Bank reckons post-tax incomes will rise by a measly 1.25% in inflation-adjusted terms in 2025, and then by just 0.25% in each of the next two years. By the end of the summer, the Bank is forecasting inflation of 3.7%, well short of the 11% peak after the Covid pandemic and Russia’s invasion of Ukraine, but significantly above the Bank’s 2% target.
For a government that has promised to create a stronger economy, which voters can feel in their pockets, the Bank’s forecasts suggest a very rocky period ahead, which no amount of pointing at shiny future infrastructure projects is able to smooth over. This uncomfortable combination of weak growth and higher prices will inevitably lead to claims that the UK is sliding towards “stagflation”, though Bailey insisted he didn’t use the word.
So what is the reason the Bank’s policymakers feel able to cut rates, despite this jump in the pace of price rises? They believe the jobs market has now weakened so much that workers will be unable to bid up their pay to compensate, creating the kind of wage-price spiral that central bankers dread.
The MPC reckons post-tax incomes – one measure of living standards – will rise by a measly 1.25% in inflation-adjusted terms in 2025, and then by just 0.25% in each of the next two years.
For a government hoping to restore economic growth in a way that voters can see on their streets and feel in their pockets, the Bank’s forecasts suggest a very rocky period ahead.