
Rate Cut Sparks Debate
The Bank of England is widely expected to lower the UK’s base interest rate this week, marking its lowest level in over 18 months.
Rate Cut Anticipated
Currently set at 4.75%, the base rate could be reduced to 4.5% following the central bank’s meeting on Thursday, February 6. This anticipated quarter-point cut would extend a series of reductions that began last summer.
The base interest rate is a crucial economic tool, influencing mortgage and loan costs, as well as the interest rates banks offer on savings accounts. In recent years, rate hikes were used to curb soaring inflation, leading to significantly higher mortgage costs compared to the past decade.
Inflation vs. Growth: A Balancing Act
At its peak in late 2023, the base rate reached 5.25%, before policymakers gradually lowered it to its current level. Their strategy has historically aimed to slow inflation by making borrowing more expensive. However, with inflation now at 2.5% — far below the highs of recent years — the focus is shifting toward stimulating economic growth, which has stagnated.
Yet, some experts warn that inflationary pressures may return. Rising energy costs and policy decisions, such as Chancellor Rachel Reeves’ move to raise national insurance contributions (NICs) for businesses, could push inflation closer to 3% in the coming months.
Uncertain Outlook for the Economy
The Bank’s Monetary Policy Committee (MPC) faces a difficult decision. Lowering rates could encourage spending and investment, but lingering inflation risks could complicate long-term economic stability.
“The economy has clearly underperformed since the last set of forecasts by the Bank back in November,” noted Thomas Pugh, an economist at RSM, “but inflationary pressure is now rising again.”
With economists split on the long-term trajectory of inflation and growth, the Bank of England’s decision this week will be closely watched — potentially shaping the economic landscape for months to come.