The Bank of England (BoE) has halved its 2025 growth forecast, now expecting the UK economy to expand by just 0.75% instead of 1.5%. The downgrade comes as the BoE cuts interest rates to 4.5%, the lowest level in over 18 months. While further cuts are expected, BoE Governor Andrew Bailey warns of economic uncertainty and inflation risks ahead.
The central bank also predicts inflation will spike to 3.7% later this year, fuelled by rising energy and water bills, before gradually cooling to its 2% target by 2027. Meanwhile, growth projections for 2026 and 2027 were slightly upgraded to 1.5%.
Is the UK Heading for Stagflation?
The combination of sluggish growth and stubbornly high inflation raises concerns about stagflation—a term used to describe an economy experiencing both stagnation (weak growth) and inflation (rising prices). This toxic mix makes policymaking particularly difficult, as cutting rates too aggressively could stoke inflation, while keeping them high could further dampen growth.
Market & Political Fallout
Following the rate cut, the pound initially fell before stabilising. Businesses have also voiced concerns, particularly over rising employer National Insurance costs, which could impact hiring and investment. Meanwhile, Prime Minister Keir Starmer insists the government will prioritise infrastructure and planning reforms to boost the economy.
With uncertainty over future US trade tariffs and inflationary pressures still looming, the UK’s economic outlook remains fragile. If growth continues to disappoint while inflation remains persistent, the BoE could find itself trapped in a stagflationary dilemma—forcing policymakers to balance supporting growth with keeping inflation in check.
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