Bank of England Slashes Growth Forecast as Interest Rates Fall
The Bank of England has halved its economic growth forecast for 2025, citing economic uncertainty, rising inflation, and higher employment costs. The economy is now expected to grow by just 0.75%, down from the previous estimate of 1.5%.
The revised outlook comes as the Bank cut interest rates to 4.5% from 4.75%, marking the lowest level in more than 18 months. Bank of England Governor Andrew Bailey confirmed that interest rates remain on a downward trajectory but warned that further cuts would be assessed “meeting by meeting” due to global economic uncertainties.
Government Reaction
The downgraded forecast deals a blow to the government, which has made economic growth one of its central priorities.
Prime Minister Sir Keir Starmer acknowledged the disappointing outlook, stating, “We’re not satisfied with growth, and this just spurs us on.”
He reiterated his administration’s commitment to turning the economy around through infrastructure projects and planning reforms
Chancellor Rachel Reeves, who recently introduced measures to stimulate the economy, faces mounting pressure following last year’s Budget decision to increase employers’ National Insurance contributions. Businesses argue the move will drive up costs, stifle investment, and impact job creation.
Inflation Concerns and Future Growth
While the Bank downgraded its short-term growth forecast, it provided a more optimistic outlook for the future, predicting 1.5% growth in both 2026 and 2027, an improvement from its earlier projection of 1.25%.
However, inflation remains a pressing concern. The Bank warned that rising energy and water bills could drive inflation up to 3.7%, delaying its return to the 2% target until late 2027. Uncertainty surrounding global trade, including potential US tariffs, could further complicate the outlook.
Political and Economic Fallout
The opposition has seized on the revised forecast to criticize the government’s economic strategy.
Shadow Chancellor Mel Stride argued that the government’s “disastrous Budget” will likely result in fewer interest rate cuts than previously anticipated.
Meanwhile, Paul Johnson, director of the Institute for Fiscal Studies, described the Bank’s downgraded forecast as a significant setback for the government.
He warned that if the Office for Budget Responsibility (OBR) adjusts its projections in line with the Bank’s assessment. As the government grapples with sluggish growth, rising inflation, and business concerns, economic recovery remains uncertain.
