LONDON (XINHUA) – Business organisations and research institutions in the United Kingdom (UK) are sceptical about the effectiveness of using interest rate cuts to stimulate economic growth after the Bank of England (BoE) made such a move recently.
The BoE recently lowered the interest rate from 4.75 per cent to 4.5 per cent. All members of the BoE’s Monetary Policy Committee (MPC) supported the rate cut. Seven of the nine MPC members voted for a 25-basis point cut, while two even supported a 50-basis point reduction.
Meanwhile, the BoE highlighted that domestic inflation remains a concern, exacerbated by higher global energy prices and uncertain geopolitical conditions. The bank now forecasts that consumer inflation could reach 3.7 per cent by the third quarter of 2025, a more pessimistic stance compared to its previous predictions at the end of last year.
Despite persistent inflationary pressures, the BoE decided to ease monetary policy primarily due to its weaker economic growth outlook. In its December policy meeting, the BoE forecast zero quarter-on-quarter gross domestic product (GDP) growth for the fourth quarter of 2024. However, the bank now expects a contraction of 0.1 per cent. For 2024 GDP growth, the BoE had previously forecast a 1.5-per-cent expansion. But this has now been slashed to just 0.75 per cent. For the first quarter of 2025, the central bank expects just 0.1 per cent quarter-on-quarter growth, in a stark contrast to the 0.7 per cent growth recorded in the first quarter of 2024.
Experts are questioning the rate cut move of the BoE.
For UK businesses, lower interest rates could reduce borrowing costs. But many firms are more concerned about the rising cost of operating a business, particularly due to higher employer national insurance contributions.
Head of research at the British Chambers of Commerce (BCC) David Bharier said that while the rate cut provides a measure of relief for small-and medium-sized enterprises, businesses are still struggling with significant cost pressures and global economic uncertainty.
“Domestically, firms face increased tax bills and employment costs within weeks, with national insurance and minimum wage hikes. Internationally, a looming trade war could hit many UK importers and exporters. This is likely to feed into heightened inflation throughout the year,” warned Bharier.
The Confederation of British Industry (CBI) did not directly assess the impact of the rate cut on growth but hinted at the difficulty of sustaining further monetary easing.
CBI’s deputy chief economist Alpesh Paleja warned that “the MPC are increasingly having to balance conflicting objectives. The CBI’s surveys show that business growth and hiring expectations have weakened. But inflation expectations are picking up, exacerbated by the rise in employment costs arising from October’s budget”.
As a result, industry leaders and economic analysts argue that while the BoE has taken monetary policy action, the key driver of economic growth lies with the British government, especially regarding the tax burden imposed on businesses in the latest fiscal budget.
BCC’s Bharier pointed out that research has shown a significant fall in business confidence, with fewer firms expecting to increase turnover over the next months. Policymakers must act quickly and work with businesses to rebuild confidence and drive growth.
Chief economist at the Institute of Directors Anna Leach was even more direct, “While the government is rightly focused on increasing investment to improve the UK’s potential growth, the reality is that decisions made last year have significantly undermined momentum and will affect levels of private investment for years to come.”
“As well as progressing swiftly with plans to unblock private sector investment through regulation and planning reform, the government should urgently reconsider the burdens placed on businesses last year, particularly employment regulations and tax changes affecting family firms and farms,” Leach added.
