Bank of England third rate cut in six months– What It Means for the UK Economy and the Pound (GBP)

The Bank of England (BoE) has lowered its key interest rate by 0.25 percentage points to 4.5%, its third rate cut in the past six months. The move signals growing concerns over stagnant economic growth, as the UK economy has barely expanded over the last half-year.

Big Ben

Why Did the Bank Cut Rates?

The BoE is attempting to boost economic activity by making borrowing cheaper, encouraging businesses and consumers to spend and invest. However, inflation remains a key concern. Currently at 2.5%, inflation is expected to rise to 3.7% before easing back towards the central bank’s 2% target.

Additionally, the central bank has slashed its 2025 growth forecast in half—from an expected 1.5% growth to just 0.75%. This downward revision highlights the weak outlook for the UK economy, which faces slow demand, declining consumer confidence, and global economic uncertainties.

What Does This Mean for the Pound (GBP) and Markets?

The immediate reaction to the rate cut saw the British pound weaken against the US dollar. This is a typical response, as lower interest rates reduce the return on UK-based assets, making the currency less attractive to investors.

On the other hand, the FTSE 100 stock index rose, as lower borrowing costs generally benefit companies by making financing cheaper. Investors also anticipate that continued rate cuts could provide some relief to struggling businesses.

Economic Implications – Will More Cuts Follow?

While the BoE has not committed to further rate reductions, it has signalled a cautious approach, watching inflation and economic data closely. If inflation remains persistent, the central bank may hold off on additional cuts. However, if economic growth continues to struggle, further reductions may be necessary.

A weaker pound could help UK exports by making goods and services cheaper for foreign buyers, but it also makes imports more expensive, potentially adding to inflationary pressures.

Final Thoughts

The BoE’s rate cut reflects growing concerns over economic weakness, but it also raises questions about the trade-off between boosting growth and keeping inflation in check. If inflation remains high while the economy struggles, the central bank could face tough decisions ahead.

For businesses and consumers, lower interest rates mean cheaper loans and mortgages, but also lower returns on savings. In the short term, this move could provide some stimulus, but whether it’s enough to lift the UK out of stagnation remains uncertain.