BANK OF ENGLAND REDUCES INTEREST RATES

Monetary Policy Summary, February 2025

The Monetary Policy Committee (MPC) sets monetary policy to meet the 2% inflation target, and in a way that helps to sustain growth and employment. The MPC adopts a medium-term and forward-looking approach to determine the monetary stance required to achieve the inflation target sustainably.

At its meeting ending on 5 February 2025, the MPC voted by a majority of 7–2 to reduce Bank Rate by 0.25 percentage points, to 4.5%. Two members preferred to reduce Bank Rate by 0.5 percentage points, to 4.25%.

There has been substantial progress on disinflation over the past two years, as previous external shocks have receded, and as the restrictive stance of monetary policy has curbed second-round effects and stabilised longer-term inflation expectations. That progress has allowed the MPC to withdraw gradually some degree of policy restraint, while maintaining Bank Rate in restrictive territory so as to continue to squeeze out persistent inflationary pressures.

CPI inflation was 2.5% in 2024 Q4. Domestic inflationary pressures are moderating, but they remain somewhat elevated, and some indicators have eased more slowly than expected. Higher global energy costs and regulated price changes are expected to push up headline CPI inflation to 3.7% in 2025 Q3, even as underlying domestic inflationary pressures are expected to wane further. While CPI inflation is expected to fall back to around the 2% target thereafter, the Committee will pay close attention to any consequent signs of more lasting inflationary pressures.

GDP growth has been weaker than expected at the time of the November Monetary Policy Report, and indicators of business and consumer confidence have declined. GDP growth is expected to pick up from the middle of this year. The labour market has continued to ease and is judged to be broadly in balance. Productivity growth has been weaker than previously estimated, and the Committee judges that growth in the supply capacity of the economy has weakened. As a result, the recent slowdown in demand is judged to have led to only a small margin of slack opening up.

In support of returning inflation sustainably to the 2% target, the Committee judges that there has been sufficient progress on disinflation in domestic prices and wages to reduce Bank Rate to 4.5% at this meeting.

Based on the Committee’s evolving view of the medium-term outlook for inflation, a gradual and careful approach to the further withdrawal of monetary policy restraint is appropriate.

In addition to the risks around inflation persistence, there are also uncertainties around the trajectories of both demand and supply in the economy that could have implications for monetary policy. Should there be greater or longer-lasting weakness in demand relative to supply, this could push down on inflationary pressures, warranting a less restrictive path of Bank Rate. If there were to be more constrained supply relative to demand, this could sustain domestic price and wage pressures, consistent with a relatively tighter monetary policy path.

The Committee will continue to monitor closely the risks of inflation persistence and what the evolving evidence may reveal about the balance between aggregate supply and demand in the economy. Monetary policy will need to continue to remain restrictive for sufficiently long until the risks to inflation returning sustainably to the 2% target in the medium term have dissipated further. The Committee will decide the appropriate degree of monetary policy restrictiveness at each meeting.

 Daniel Austin, CEO and co-founder at ASK Partners, said:

“The Bank of England’s decision to lower interest rates to 4.5% marks a pivotal moment for the UK real estate market. While this move may provide some relief for borrowers, the broader impact will depend on how quickly lenders adjust mortgage rates and how sustained the rate-cutting cycle becomes. For homeowners and prospective buyers, lower rates should, in theory, make mortgages more affordable. However, the current market dynamics, where fixed mortgage rates have remained elevated despite previous signs of easing, suggest that any immediate impact may be muted. That said, a more stable rate environment could help restore buyer confidence, particularly among those who had been waiting for clarity before entering the market.

“For investors and developers, the trajectory of rate cuts will be crucial. With inflation now closer to the Bank’s 2% target, there is renewed optimism that financing conditions will improve, unlocking capital for new developments. Demand remains strong, particularly in sectors like co-living and build-to-rent, where supply constraints continue to drive investor interest. As we approach a potential shift in government policy and economic strategy, real estate stakeholders should remain agile. If rates continue to fall towards 3.5% by year-end, as some predict, this could fuel a more sustained recovery in transaction volumes and investment flows. However, uncertainty remains, and prudent financial planning will be key as the market navigates this transition.”