Economic forecasts issued by the Bank of England - February 2025

The Bank of England issued a decision today to lower interest rates on Thursday with the full consensus of its members, reducing the rates by 25 basis points to 4.50%. At the same time, two members voted for a larger reduction of 50 basis points. The monetary policy report released by the Bank of England included the quarterly economic forecasts, which can be summarized as follows:

• Progress continues in reducing inflation in price and domestic wage pressures.
• The Monetary Policy Committee is focused on the continuing inflationary pressures in the medium term.
• There are significant uncertainties regarding the balance of demand and supply in the economy.
• The inflation rate in the Consumer Price Index (CPI) is expected to be 2.5% in the fourth quarter of 2024, aligning with the forecasts from the November report.
• The CPI inflation rate excluding energy is projected to decrease to about 3.25% in the second half of 2024, down from about 8.5% in mid-2023.
• CPI inflation is expected to sharply rise to 3.7% in the third quarter of 2025 due to global energy costs and regulated prices, but no additional second-round effects on domestic inflation are anticipated.
• The slowdown in demand has led to a small margin of recession, with weak growth in supply capacity.
• Labour supply growth has been strong, but productivity remains weak; the labor market is considered broadly balanced.
• The surplus supply margin is expected to widen to about ¾% of potential GDP over the next few years before narrowing slightly. The unemployment rate is expected to gradually rise to about 4¾%. Annual potential growth in supply is expected to increase to 1½% in the medium term, supporting GDP growth of more than 1½% by the end of the forecast period.
• There are significant risks related to the surplus supply trajectory, with the possibility of sustained weak demand or constrained supply affecting inflationary pressures.
• The Monetary Policy Committee's outlook remains consistent with the view that the emerging recession in the economy will help mitigate the ongoing second-round effects and bring CPI inflation back to the 2% target in the medium term.

To be continued...