UK Economy Holds Steady As BoE Eyes Gradual Rate Cuts Amid Persistent Inflation

The latest Reuters poll offers a cautiously optimistic outlook for the UK economy, projecting modest but stable growth through 2025 and 2026. Despite lingering inflationary pressures, economists expect the Bank of England to continue its measured rate-cutting cycle, with one more reduction anticipated this year and another in early 2026. The poll results, unchanged from July, reflect a consensus that the UK economy is showing resilience, even as global uncertainties and domestic challenges persist.

 

Growth Forecasts Remain Unchanged

- UK GDP is expected to grow at an average rate of 1.1 percent in 2025

- Growth is projected to tick slightly higher to 1.2 percent in 2026

- These figures mirror the July poll, indicating stable expectations among economists

- The economy expanded by 0.3 percent in the previous quarter, outperforming other G7 peers

- Business sentiment and consumer confidence have shown gradual improvement, supporting the growth outlook

 

Interest Rate Path Signals Cautious Easing

The Bank of England, which recently cut its Bank Rate to 4.00 percent, is expected to trim rates further in a slow and deliberate manner:

 

- A 25 basis point cut is anticipated in the fourth quarter of 2025, bringing the rate to 3.75 percent

- Another 25 basis point reduction is forecast for early 2026, lowering the rate to 3.50 percent

- These projections remain consistent with July’s poll, suggesting no major shift in monetary policy expectations

- The central bank has already implemented five rate cuts since August 2024, down from a peak of 5.25 percent

- Economists expect the BoE to maintain its cautious stance, balancing inflation risks with growth support

 

Inflation Remains a Sticky Challenge

While the BoE continues its easing cycle, inflation remains above target:

 

- Consumer prices rose 3.6 percent in June, driven by food and transport costs

- Inflation is expected to peak at 4.0 percent in the third quarter before gradually easing

- Forecasts suggest inflation will average 3.2 percent in 2025 and 2.4 percent in 2026

- Wage growth remains elevated, with average weekly earnings rising 5 percent in the three months to June

- Economists warn that persistent wage pressures could delay further rate cuts

 

Labour Market and Consumption Trends

The UK labour market is showing signs of loosening, which may support the BoE’s easing path:

 

- Unemployment has climbed to 4.7 percent, the highest level since 2021

- Consumption growth remains subdued, with households cautious amid tax uncertainties

- Falling mortgage rates and expectations of cheaper loans are offering some relief to consumers

- The government’s Autumn Budget may introduce new fiscal measures to stimulate demand

Policy Division Within The BoE

 

The Monetary Policy Committee has faced internal divisions over the pace of rate cuts:

 

- The most recent rate decision was passed with a narrow 5-4 vote

- Some members advocated for a deeper 50 basis point cut, while others preferred to hold rates steady

- Governor Andrew Bailey emphasized the need for gradual easing, warning against aggressive moves

- Future decisions may continue to reflect split votes, especially if inflation surprises to the upside

 

Conclusion: A Balancing Act Ahead

The UK economy is navigating a delicate balance between inflation control and growth support. With GDP growth expected to remain steady and inflation slowly easing, the Bank of England is likely to continue its cautious rate-cutting cycle. However, risks remain tilted toward persistent price pressures and wage growth, which could complicate the central bank’s path forward. As policymakers weigh their next moves, investors and households alike will be watching closely for signs of economic momentum or further headwinds.

 

Source: Reuters, Moneycontrol, MSN News, Investing.com (August 19, 2025)