The Bank of England has cut its benchmark interest rate by a quarter point to 4.5%.
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% cut.
However the Bank also downgraded its forecasts for growth projecting that GDP fell 0.1% in the fourth quarter of 2024 and will rise by just 0.1% in the first quarter of 2025.
The growth forecast for the year has been halved to 0.75%.
The opens the door to a “Reeves recession” over the winter half of the year if the economy underperforms in the first quarter and also shrinks.
A recession is defined as two consecutive quarters of negative growth.
The cut - widely anticipated in the City - lowers the cost of borrowing down to its lowest level since June 2023 when rates were rising rapidly during the dramatic inflation spike that followed Russia’s full scale invasion of Ukraine.
It is the third reduction since the Bank first started cutting from a peak of 5.25% last August. That was followed by another downward move in November.
Today’s decision will bring immediate relief to the hundreds of thousands of homeowners on variable rate or tracker mortgages with interest rates that move in line with the Bank of England’s decisions.
On a typical London mortgage of £300,000 repayments will fall around £43 a month from £1,710 to £1,667.
Small businesses struggling under a burden of heavy borrowing will also benefit.
For the vast majority of mortgaged homeowners fixed deals there will be no immediate change but lenders are expected to start bringing down the cost of the deals over the coming weeks in anticipation of more cuts from the Bank of England.
Some economists are now penciling in as many as three or four cuts this year.
One leading City forecaster Simon French, head of research at Panmure Liberum, went further this week, suggesting there will be six reductions in 2025, bringing the Bank’s rate down to 3.25%.
The Bank’s Governor Andrew said:” "We expect to be able to cut bank rate further as the disinflation process continues, but we will have to judge meeting by meeting, how far and how fast.”
However, he added: "We live in an uncertain world, and the road ahead will have bumps on it."
The Bank’s decision follows a growing body of evidence that the British economy is struggling to gain any momentum and could even be on course for a shallow recession over the winter.
Latest GDP figures showed that the economy only grew by 0.1% in November, disappointingly below economists’ forecasts. It followed two months of falling output.
The Bank is now expecting no growth at all during the fourth quarter of the year. If the December GDP figure next week is worse than expected then fourth quarter output could even be negative.
Economic uncertainty has been heightened by President Trump’s introduction of tariffs against China and the threat to impose then against Mexica, Canada and the European Union
At the same time inflation has been slightly more muted than expected falling to 2.5% in December, still above the Bank’s official target of 2%
.
