U.K.: Slow growth, lingering inflation, gradual rate cuts

Summary

• After experiencing solid growth during the first half of last year, the U.K. economy essentially came to a standstill in the second half of 2024, including just a 0.1% quarter-over-quarter gain in Q4 GDP. Subdued sentiment suggests a continued slow pace of economic growth in the near term, and we would also argue fiscal policy dynamics are turning less supportive of the growth outlook as well. We have lowered our 2025 U.K. GDP growth forecast to 0.8%, from 1.5% previously.

• The news on the inflation front is mixed. While inflation slowed more than expected in December, the Bank of England (BoE) still expects a further rebound of inflation on the back of higher energy prices and regulated price increases, and attributed the slowing in services inflation to some volatile price categories. Wage growth has picked up recently and remains elevated, especially given the U.K.'s recent underwhelming productivity performance.

• Against this backdrop of slowing growth and mixed inflation trends, the BoE lowered its policy rate 25 bps to 4.50% last week. We view the BoE announcement as decidedly mixed, with the central bank forecasting slower growth but faster inflation. The BoE said there has been substantial progress on disinflation, but also that a “gradual and careful” approach to easing remains appropriate, and that monetary policy will need to remain restrictive for sufficiently long.

• We view these mixed BoE comments as very much consistent with a once-per-quarter rate cut pace. Our view remains for 25 bps rate cuts in May, August, November and February, with the policy rate expected to reach a low of 3.50% by early 2026. We also view steady rate cuts and weak U.K. economic growth as consistent with moderate weakness in the pound versus the U.S. dollar over the medium term.

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