Laith Khalaf, head of investment analysis at AJ Bell, comments: “The most striking announcement from the Bank of England today is not the cut in interest rates, but the prospect of inflation rising to 3.7% this year while its forecasts show the economy continuing to flirt with recession. Rising prices will not make for happy consumers who have might have hoped that high inflation is in the rear-view mirror.
“CPI at 3.7% is nowhere near the double-digit inflation we saw at the height of the cost of living crisis, but it adds to the cumulative load of price rises. It also sets up the potential for a round of higher salary negotiations, and with wage growth already running hot, this might stoke further inflationary pressures. The Bank can control these by keeping interest rates higher, which would mean more sustained pain for mortgage borrowers and for companies refinancing debt.
“The primary culprit for rising inflation is higher energy prices, but the chancellor’s Budget policies are also expected to push up prices. Namely the hike in National Insurance, VAT on private schools and the rise in the cap on bus fares. The big downgrade in the growth forecast for 2025 will also come as a blow to the chancellor who has made growth her key mission. It’s looking increasingly likely that Rachel Reeves is going to have to do something substantial alongside issuing the Spring Statement in March, despite committing to only one fiscal event per year.
“The market is still pencilling in two interest rate cuts by the end of this year, but beyond that rates are expected to remain pretty steady at around 4% for the next couple of years. Predicting rates so far out is about as reliable as reading tea leaves at the best of times, but given the ructions we’ve seen in international markets as a result of President Trump’s new tariff proposals, the crystal ball is clouded by an especially dense fog at the moment.
“The Bank hasn’t factored into its forecasts any effects from Trump’s trade tariffs at the moment, seeing as they have only just started to emerge and are highly uncertain in their formulation and implementation. However, we know rising global trade tariffs do pose a further threat to UK economic growth and the inflationary environment. Overall, the Bank is painting a pretty bleak, stagflationary picture for 2025, which could get worse if Trump pushes through with widespread trade tariffs. It’s not the news anyone wants to hear, but then again, we’re getting used to it.”
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