You’re going to need a bigger rabbit to pull out of your hat, chancellor

The quarter-point interest rate cut is just the start – there should be another two or three before the end of the year, says James Moore. But there’s no escaping those growth figures and the shadow of ‘stagflation’…

Businesses, borrowers and especially Rachel Reeves breathed a sigh of relief when the Bank of England delivered its widely expected interest rate cut.

Base rates have fallen from 4.75 per cent to 4.5 per cent – which is still quite restrictive, especially when you consider the thick mud the UK economy is currently slogging through.

There wasn’t much else to celebrate in the accompanying release from the Bank’s rate-setting Monetary Policy Committee (MPC), which made liberal use of red ink in updating its forecasts, which included cutting its 2025 growth expectation in half, to 0.75 per cent, from 1.5 per cent previously.

The Bank is clearly worried, and it was notable that two MPC members voted for a larger, half-point cut. That one of them was leading interest rate dove Swati Dhingra, who has consistently argued that UK plc needs lower rates, came as no surprise – but the identity of the other, the hawkish Catherine Mann, was a real eye-opener, especially considering the second big nasty in the Bank’s minutes and accompanying report.

It was the Bank’s prediction that global energy prices will push inflation up to 3.7 per cent in the second part of the year, “even as underlying domestic inflationary pressures are expected to wane further”. Threadneedle Street still thinks the latter will help pull the Consumer Prices Index (CPI) down to the Bank’s 2 per cent target later on.

But that will come as little consolation in Downing Street.

The fear of stagflation – high rates, high inflation and low growth – was all over the Bank’s minutes. The UK economy increasingly looks like it is stuck in a rut, partly of the chancellor’s construction.

It bears repeating that last month, the latest Purchasing Managers Index (PMI) from S&P, a closely watched indicator, recorded a figure of 50.80 for the dominant service sector, with anything above 50 representing growth – down from 51.10 points in December 2024. That’s the lowest figure in three years.

S&P’s survey found jobs being shed at a rapid clip, and firms complaining of rising costs ahead of Reeves’s increase in employer national insurance contributions (NICs) landing in April, when the minimum wage is also scheduled to rise. Both of these are inflationary measures.

Firms have been crying out for the relief that lower rates will give them. Lower rates mean lower financing costs, which they desperately need.

This will have been heard loudly when MPC members go out on the road, an invaluable exercise because, while price stability is their overriding goal, they absolutely should hear from the people who suffer the consequences of their decisions.

The City now expects another two or three more quarter-point cuts this year. Some forecasters, encouraged by the dovish nature of the vote, go further. Capital Economics, for example, expects to see “a decline to 3.50 per cent by early 2026”, which is “already below investors’ expectations of a fall to 3.75 per cent”.

I’m not so sure. Despite the surprising decision by Catherine Mann – she had voted no change last time when three MPC members went for a cut – the MPC once again loudly stressed its “gradual cautious approach” to moving rates down.

It has been more cautious than other central banks, which have been prepared to institute bigger cuts than its preferred 0.25 point move.

Reeves welcomed the decision but said she was still “not satisfied with the growth rate”. Nor should she be. It is miserable. An ageing thoroughbred would comfortably outpace it.

Ministers, led by Reeves, have become quite fond of quoting the OECD, which has forecast that the UK will grow by 1.7 per cent this year, faster than France, Germany and Italy, the other European economies in the G7 – and faster than Japan, too.

I would expect that forecast to come down. I’m afraid that the economic year 2025 is shaping up to be every bit as bumpy as 2024 was. The NICs hike is a major cause of that, resulting in falling business investment and confidence. Let’s not forget the uncertain international situation, and Donald Trump for threatening (and imposing) tariffs on his trading partners.

The chancellor is putting an awful lot of faith in ripping up planning rules and “getting Britain building again” to turn things around. That would be nice. But it may not be enough. She needs to find a bigger rabbit in her hat.