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Bank of England halves growth forecast for the UK - YAHOO FINANCE
BY Pedro Goncalves Finance Reporter, Yahoo Finance UK
The Bank of England has downgraded its growth forecast for the UK, warning that the economy will expand by just 0.75% this year, a significant cut from the 1.5% growth it predicted just three months ago. This marks a blow to the government, with the outlook now suggesting the country is at risk of a protracted period of sluggish growth.
The Bank’s latest forecast also revealed that the economy contracted by 0.1% in the final quarter of 2024, after stagnating between July and September. The gloomy prediction signals a broader slowdown, with the Bank attributing the weakening economic activity to a decline in business confidence, as well as weaker household spending and business investment intentions.
"The current weakness in GDP is judged to reflect not only a slowdown in demand but also a degree of weakening in supply growth over the past year," the BoE said.
The BoE also warned that inflation is expected to "rise quite sharply" later this year, driven by higher costs for water bills, bus fares, and energy, meaning it will take longer for inflation to return to the Bank’s target of 2%.
Chancellor Rachel Reeves voiced her dissatisfaction with the current rate of economic growth. "This interest rate cut is welcome news, helping ease the cost of living pressures felt by families across the country and making it easier for businesses to borrow to grow," she said. "
“However, I am still not satisfied with the growth rate. Our promise in our Plan for Change is to go further and faster to kickstart economic growth and put more money in working people’s pockets. That’s why we are taking on the blockers to get Britain building again, ripping up unnecessary regulatory barriers and investing in our country to rebuild roads, rail, and vital infrastructure."
Despite the Bank’s lowered near-term growth forecasts, both Bank of England governor Andrew Bailey and deputy governor Clare Lombardelli said they were “very, very strong supporters of growth”, when confronted with Reeves’ plans for the proposed third runway at Heathrow. They acknowledged that any immediate impact from these projects on the UK economy would be minimal, with a longer-term boost more likely if the projects go ahead.
The Bank's quarterly Monetary Policy Report (MPC) also highlighted the potential negative impact of tariffs and trade barriers on UK economic activity, although the effects on inflation remain "highly uncertain."
In a bid to support the economy, the Bank of England has reduced its base interest rate to 4.5%, the lowest level in 20 months, providing some relief to mortgage holders across the UK.
Thomas Pugh, economist at RSM UK, said: "It’s no surprise that the MPC chose to cut interest rates to 4.5%. The collapse in growth at the end of last year and the sharp slowdown in the labour market made that the obvious choice. However, the path forward will be much more difficult for the MPC to navigate. Both the hike in employment costs imposed by the budget and the looming threat of tariffs or a global trade war are stagflationary.
“Survey data suggests firms are more aggressive in passing on rising costs than the Office for Budget Responsibility had assumed, which will push up inflation. At the same time, growth has been weaker than expected. The MPC will want to cut rates to support medium-term growth, but it will be restrained by rising inflation. We foresee three more rate cuts this year, but the risks are rising, which could impact the frequency of cuts."
Simon Dangoor, head of fixed income macro strategies at Goldman Sachs Asset Management, noted the challenges the Bank faces. "Amid a stagnant economy and worsening labour market, the BoE delivered the anticipated 25bps cut (7-2 vote with Mann and Dhingra surprisingly voting for a 50bps cut), with a dovish tone. Despite inflation risks, the BoE has maintained its 'gradual' easing guidance. We foresee the BoE continuing its quarterly easing pace through the uncertain period in H1 but accelerating in H2 when the dust settles, with a total of five cuts this year."
Neil Birrell, chief investment officer at Premier Miton Investors, also pointed to the economic headwinds facing the UK. "The Bank of England cut its base rate to give the economy the boost it needs. The fact that two members voted for a 0.5% cut is telling, clearly showing concern over the parlous state of economic growth, which is not something the government will appreciate.
“With growth under threat and inflation remaining higher than hoped, that combination is likely to see the word 'stagflation' being bandied about."
The Bank of England will meet again to discuss rates on 20 March.
