Rate cut ‘too little, too late’ for stagnant economy, says IEA Economics Fellow

Commenting on the Bank of England’s decision to cut interest rates to 4.5%, Julian Jessop, Economics Fellow at the free market think tank the Institute of Economic Affairs, said:

“The Bank of England’s decision to cut interest rates today was welcome but overshadowed by a gloomy set of forecasts. The Bank has been forced to cut because the UK economy is crashing.

“The Bank now expects GDP to stagnate in the short term and to grow by just 0.75% in 2025 as a whole – half the pace predicted as recently as last November.

“Moreover, headline inflation is now expected to rise as high as 3.7% later in the year. This seems too pessimistic, given the weakness of money growth and the slump in the real economy. But at least the MPC has shown it is willing to look past the temporary effect of higher energy costs and focus on underlying price pressures.

“The Bank will probably continue lowering rates gradually but rates will remain ‘restrictive’, meaning that they will still hold back growth. It would have been better to cut by at least 0.5% today, as recommended by the IEA’s shadow Monetary Policy Committee and by two members of the real MPC.

“Remember also that the OBR had already factored in another 1% of cuts over the next year or so (to 3.5%) in the October Budget. Rate cuts along these lines will not therefore improve the forecasts for the public finances.

“Overall, it is good news that rates have been cut, and they will almost certainly be cut further over the course of 2025. But the key driver is the worsening economic outlook, with growth stagnating and inflation expected to pick up sharply. Again, the MPC appears to be doing too little, too late.”