Bank of England Lowers Interest Rate to 4.5%, Marking 19-Month Low

Central Bank Cuts Rate by 0.25 Percentage Points Amid Economic Concerns

The Bank of England (BoE), the United Kingdom's central bank, has reduced its benchmark interest rate from 4.75% to 4.5%, marking the lowest level in 19 months. This 0.25 percentage point cut, announced on February 6, aligns with market expectations, but the decision also revealed unexpected shifts within the Monetary Policy Committee (MPC). According to Bloomberg and Reuters, the MPC voted 7-2 in favor of the rate cut. However, what surprised many was that two committee members advocated for an even steeper reduction to 4.25%. Notably, one of the members pushing for the 0.5 percentage point cut was Catherine Mann, known for her traditionally hawkish stance, which signals growing concerns over the UK’s economic trajectory.

Luke Bartholomew, Deputy Chief Economist at investment firm Abrdn, noted that the call for a larger cut highlights the apprehension among some policymakers about the headwinds facing economic growth. This internal division within the BoE suggests that debates over the pace and extent of future rate adjustments are intensifying. BoE Governor Andrew Bailey emphasized the bank’s cautious approach, stating, "We will closely monitor both the UK and global economic conditions and adopt a gradual, prudent strategy when considering additional interest rate cuts."

This latest rate reduction follows a series of adjustments over the past year. In August, the BoE lowered the rate from a 16-year high of 5.25% to 5%, followed by another cut to 4.75% in November. The February decision comes three months after the last cut, with the central bank having maintained rates steady in December and January. Despite these reductions, inflationary pressures remain a concern. While the annual inflation rate eased to 2.5% in December, it still exceeds the BoE’s 2% target. Furthermore, projections indicate that the Consumer Price Index (CPI) could peak at 3.7% in the third quarter of this year, significantly higher than the previous estimate of 2.8%. This outlook suggests that the UK’s economic challenges are far from over, potentially complicating the BoE’s future policy decisions.

Adding to the uncertainty is the global economic environment, particularly the potential impact of U.S. trade policies under President Donald Trump. Concerns about tariff-related inflationary pressures could force the BoE to reconsider its easing cycle and even contemplate rate hikes if necessary. Economists at Citi highlighted this dilemma in a note to clients, stating, "The Bank of England’s interest rate cutting cycle is entering a more challenging phase." This reflects not only the domestic inflation risks but also the broader geopolitical factors that could influence the UK’s monetary policy path.

As the BoE navigates these complex dynamics, its policy decisions will continue to be closely watched by markets, businesses, and households alike. The delicate balance between supporting economic growth and controlling inflation will be critical in shaping the UK’s financial landscape in the coming months.