Rachel Reeves has received dire news on her hopes to fulfil Labour’s primary mission of reigniting economic growth in the UK.
In a blow to the chancellor, the Bank of England has halved its projections for growth because of the extra NHS spending announced in Ms Reeves’ Budget last year and inflation is now expected to rise to 3.7 per cent, higher than previously estimated.
Ms Reeves, whose future as chancellor is being questioned over her record in the first seven months of the Labour government, was warned the “putrid” new growth forecast “needs to be a wake up call” with calls for her to do more to help businesses struggling with the fallout of her Budget.
However, the Bank gave her a much needed boost as it announced a cut in interest rates from 4.75 per cent to 4.5 per cent. As well as providing relief for businesses, the cut will help thousands of people on mortgages who will see there monthly payments fall. A homeowner with a £300,000 tracker mortgage will see monthly repayments fall around £43 from £1,710 to £1,667.
The rate cut is the first piece of good news for a chancellor who has been beset by poor economic figures since taking office and has also been the subject of speculation about whether she can survive in the Treasury.
However, in less good news for Ms Reeves, the Bank downgraded its growth forecast for the UK economy to 0.75 percent for this year, down from previous estimates of 1.5 percent, before accelerating again in 2026 and 2027. It projects that GDP fell 0.1 per cent in the fourth quarter of 2024 and will rise by just 0.1 per cent in the first quarter of 2025.
Paul Johnson, director of the influential economics think tank the Institute for Fiscal Studies (IFS), called the Bank of England update a “pretty pessimistic forecast”.
Mr Johnson posted on X, formerly Twitter: “OBR is generally much more optimistic than the Bank, but if it moves in a similar direction that will spell trouble for the Chancellor.”
And, in his assessment, Bank governor Andrew Bailey warned that US trade tariffs, even if not imposed directly on the UK, could hit growth.
“If there were to be tariffs that contributed to a fragmentation of the world economy, that would be negative for growth for the world economy. I hope that doesn’t happen, but that could happen,” Mr Bailey said.
“The impacts on inflation are much more ambiguous.”
The Bank’s announcement follows Ms Reeves’ major speech last week where she doubled down on her economic growth agenda in a bid to relaunch her economic plan with proposals to unleash massive building projects across the UK including a new runway at Heathrow Airport.
Downing Street backed the chancellor, repeating a pledge that she will stay in the role for the whole of this Parliament.
Speaking on a visit to Lancashire, prime minister Sir Keir Starmer said people would have “more money in their pockets” as he welcomed the Bank of England’s decision to cut interest rates.
The prime minister told broadcasters: “I think it’s important to look at what’s happened. The interest rate has come down, that’s the third drop in interest rates since July.
“That’s good news because for many people watching this it means they will have more money in their pockets. Wages are going up higher than inflation, so again people feel better off. The minimum wage has gone up.”
He added: “We are absolutely determined we are going to grow the economy, and I don’t mean a line on a graph, I mean people feeling better off.”
But shadow chancellor Mel Stride said that while the cut in interest rates “will be welcome news” for families and businesses he warned the Bank of England’s weaker-than-expected growth predictions showed “confidence is falling and Labour’s Budget is fuelling inflation”.
Labour’s “disastrous Budget is likely to mean fewer rate cuts this year than previously anticipated”, he added.
Liberal Democrat Treasury spokesperson Daisy Cooper said the new growth forecast should be a ”wake up call for the chancellor“ and called on her to scrap her “misguided national insurance hike” on employers next month and drop her refusal to “negotiate a bespoke UK-EU Customs Union”.
Anna Leach, chief economist of the Institute of Directors (IoD), urged Ms Reeves to reconsider “additional burdens” placed on businesses last year, in particular “pernicious tax changes affecting family firms, farms and non-doms” and employment regulations.
Ms Reeves’ Budget decisions had “significantly undermined” business momentum “and will affect levels of private investment for years to come,” she said.
And she added that the forecasts presented a “worrying outlook for the UK”, with inflation up and growth down “stagflation risks remain on the table”.
The Bank’s rate setting Monetary Policy Committee (MPC) voted by 7 to 2 to bring rates down. Two members of the MPC voted for a bigger 0.5 percent cut.
The interest rate cut has been welcomed across the political spectrum as well as by businesses and trade unions.
TUC general secretary Paul Nowak said: “This rate cut is badly needed to help lift the economy out of stagnation. The Bank must now keep moving with further cuts to support households and businesses in the months ahead.
“Lower borrowing costs will ease pressures on households, helping families with their weekly budgets and leaving them with more to spend. And it will make it more affordable for businesses to invest and grow.”
Alpesh Paleja, deputy chief economist, CBI, said: “Today’s cut to interest rates was in line with our expectations and reinforces our view of a gradual loosening in monetary policy over this year.”
But he warned: “However, the Monetary Policy Committee are increasingly having to balance conflicting objectives. The CBI’s surveys show that business’ growth and hiring expectations have weakened. But inflation expectations are picking up, exacerbated by the rise in employment costs arising from October’s Budget.
“Therefore, while we still expect a few more rate cuts this year, risks to this forecast are now balanced in either direction. Incoming data over the coming months will be key in determining how the MPC will move next.”
In response to the Bank’s announcements, Downing Street said investing in the NHS was “good for the economy and good for growth”.
On the projected inflation rise, No 10 pointed to the latest forecast by the Office for Budget Responsibility (OBR) that it would remain close to the target of 2 per cent.
