The Bank of England interest rate cut suggests there are more gloomy times ahead

Good morning. As anticipated, on Thursday the Bank of England cut UK interest rates from 4.75% to 4.5%, their lowest level since June 2023. The cut, the third in six months, will affect mortgages, loans and savings, and offer some relief to borrowers.

The Bank’s monetary policy committee voted 7-2 in favour of the reduction. (In a surprise twist, the two dissenting members pushed for an even bigger cut.)

The prime minister and the chancellor, Rachel Reeves, welcomed the decision, but Reeves added that she is “not satisfied” with the UK’s sluggish economic growth. The bank’s widely expected move comes amid weak economic growth in the UK, and concerns over the Trump administration’s erratic trade policies. The news sent the pound tumbling against the US dollar, compounding earlier losses.

However, rate cuts are only part of the picture. In a blow to the chancellor, the Bank also downgraded its growth forecast for the UK from 1.5% to 0.75%, and warned that inflation could climb to 3.7% by autumn, rekindling fears that the cost of living crisis will continue longer than initially expected.

For today’s newsletter, I spoke with the Guardian’s economics correspondent, Richard Partington, about what this means for the UK’s faltering economy. That’s right after the headlines.

Five big stories

In depth: ‘Some really gloomy news’

To Labour’s dismay, the Bank’s forecasts suggest a turbulent period ahead. Economic growth has sat at the very top of Labour’s agenda since taking office, with the chancellor and the prime minister making clear that it is their top priority.

Yet despite this focus, the economy has continued to struggle. In the three months to November, GDP saw no growth at all. A marginal uptick of just 0.1% in November – weaker than hoped – offered the chancellor only a brief reprieve.

The broader picture, reinforced by Thursdays’s announcements, suggests that the UK is moving towards a period of stagflation. Reeves acknowledged that recovery may take longer than hoped but insisted she is “determined to go further and faster” to drive growth.

A mixed bag

The governor of the Bank of England, Andrew Bailey, said the Bank will continue cutting interest rates gradually and cautiously, reinforcing expectations that rates will fall further over the coming year. “There is also some really gloomy news in the Bank’s forecast,” says Richard Partington, highlighting the predicted spike in inflation and the sharp downgrade in economic growth from 1.5% to just 0.75%.

“Normally, if inflation were set to hit 3.7% – almost double the Bank’s target – the central bank wouldn’t even consider cutting rates. But what it’s saying today is that the economy is so weak it can look past this period of high inflation,” Richard explains. It’s a delicate balancing act but, as Bailey has suggested, there is a belief that inflation will be a short-term strain and is expected to return to target in the coming years.

What it means for households

About 629,000 households with base rate tracker mortgages will see their rates drop in line with the Bank’s decision – so it’s great news if you’re going to remortgage later this year. However, most borrowers, as Hilary Osborne explains in this useful guide, will not see change in their monthly bills. Savers with easy-access accounts – and those without fixed interest rates – are also likely to feel the effects of the cut.

Meanwhile rising energy prices, driven by an unusually cold winter in Europe, are set to push inflation higher. “This is really bad news for households, who will feel the squeeze from rising costs,” Richard warns. A sputtering economy is also likely to bring higher unemployment and weaker consumer spending, which could deal a further blow to businesses.

A balancing act

In some ways, the Bank’s announcement is “damaging to the government’s credibility,” Richard says. The economy has remained largely stagnant since the spring and business and consumer confidence remains weak – some business leaders attribute this to the chancellor’s decision to increase employer national insurance contributions by £25bn.

Reeves has worked hard to win the confidence of businesses and reassure the public that the government is driving economic growth. Last week, she announced a series of proposals aimed at stimulating the economy, including controversial plans for a third runway at Heathrow (for more on that, catch up here). However, the benefits of such measures will take years to materialise – “well past the next general election,” Richard points out. The political dilemma is that while Britain has long needed infrastructure investment, and these projects will yield positive long-term results, Labour is unlikely to see any immediate political gain. Instead, the party risks taking the blame for weak short-term economic performance.

It’s not all bad news for the government, though. If markets expect the Bank to continue cutting interest rates this year, that could provide a boost for the chancellor’s spring statement. At the start of January, there were concerns that rising borrowing costs would erode Reeves’s fiscal headroom, potentially forcing tax hikes that the government promised it would not implement. “Now, it seems the market expects further rate cuts, which should lower government borrowing costs – at least for now,” Richard says.

Still, narrowly avoiding a technical recession won’t be enough for a government that has staked its reputation on bold economic expansion. With promises to create “Europe’s Silicon Valley” in the UK and deliver record levels of growth, Labour faces mounting pressure to turn rhetoric into reality.

What else we’ve been reading

• Almost half a century on, the cult of Margaret Thatcherstill baffles Polly Toynbee. In her column, she lists the many decisions the first female prime minister made that still resonate today, concluding that “she is not history and certainly not entertainment. She is the unfortunate lived present.” Charlie Lindlar, acting deputy editor, newsletters

• Delaney Nolan has a troubling report about unhoused people in New Orleans being bussed to a warehouse with no heating and no blankets as part of a $17.5m dollar scheme, as the city prepares to host the Super Bowl on Sunday. Nimo

• Louis Staples looks back at The Apprentice as the programme turns 20, and considers the legacy of a show that has produced many stuffed shirts, few genuine business leaders and, more consequentially, popularised Donald Trump. Charlie

• Speaking of Trump, Judith Butler is a must read on the US president’s “sadism” and how important it is to not become “paralyzed with outrage”. Nimo

• For our considered shopping section The Filter, Jane Hoskyn took on the tough task of trying out dozens of mattresses in pursuit of the one true sleep saviour. Are the luxury foam ones worth it? Find out here. Charlie

Sport

Football | Liverpool had a 4-0 win against Spurs in the Carabao Cup semi-final second leg.

Rugby | Steve Borthwick believes that Marcus Smith can be England’s “gamechanger” against France after shifting the Harlequins playmaker to full-back and handing Fin Smith a first start at fly-half for Saturday’s crunch clash.

Football | Sam Kerr’s fiancee said the footballer was “speaking her truth” when she called a police officer “stupid and white”, a court has heard.

The front pages

“Fears over stagflation as Reeves growth plan suffers double blow” is the Guardian’s splash for Friday while the Financial Times has “Bank of England halves forecast for growth as rate cut powers FTSE100” and the Times says “Bank’s alert on growth gives Reeves new setback”. The i fits a lot in – “New growth and inflation warning piles pressure on Reeves to boost flagging economy”. The Mail says there is a “New era of stagflation” as it blames “Reeves’s ruinous Budget”. “Bloated state is harming economy” – that’s the Telegraph while the Express uses some non-standard economic jargon with “Reeves ‘wake up call’ on ‘putrid’ figures”. Page one lead in the Mirror is “Chef Gino’s ‘sexual & aggressive comments’” and the Metro has “Bedlocked” saying hospitals are in “crisis over winter vomiting bug”.

Something for the weekend

Our critics’ roundup of the best things to watch, read, play and listen to right now

Music
Olly Alexander: Polari | ★★★☆☆
It isn’t melodramatic to say that Olly Alexander’s debut solo album comes at a crucial moment in his career. Four years ago, his ever-escalating success seemed assured. But the subsequent album with his band Years & Years, Night Call, was met with a muted response, and last year Alexander gamely entered a Eurovision song contest that became mired in controversy over the presence of Israel. His song wound up coming 18th. Clearly, Polari is an album that needs to redress the balance. At its best, Polari feels a little like Brat’s gay BFF, also shooting decades-old club music through a modern pop lens. Alexander obviously wants the music he makes to have a certain edge, but clearly hankers after the kind of mainstream audience that prefer their pop edgeless. Squaring the two impulses isn’t impossible, but it’s undoubtedly difficult. Polari has its moments, but in the language that gives it its title, it’s bona, rather than fantabulosa. Alexis Petridis

Film
The Seed of the Sacred Fig | ★★★★☆
Mohammad Rasoulof is a fugitive Iranian director and dissident wanted by the police in his own country, where he has been sentenced to flogging and eight years in prison. Now he has produced a brazen and startling picture which, though flawed, does justice to the extraordinary and scarcely believable drama of his own situation and the agony of his homeland. Iman (Missagh Zareh) is an ambitious lawyer who has just been promoted to state investigator. He gets a handsome pay rise and better accommodation for his family. But Iman is stunned to discover that he is expected to rubber-stamp death-penalty judgments without reading the evidence. Most fatefully of all, he is issued a handgun for his family’s protection. When the gun goes missing, Iman suspects one of the women in his family has taken it and is lying to him. It’s a movie about Iranian officialdom’s misogyny and theocracy, and sets out to intuit and externalise the inner anguish and psychodrama of its dissenting citizens. Peter Bradshaw

TV
Apple Cider Vinegar | ★★★★☆
We may have a budding Netflix micro-genre on our hands. First came Inventing Anna, the story of super-scam artist Anna Sorokin, who glided through New York high society posing as a German heiress while relieving her marks of bountiful sums of money. Such a tale, too, is Apple Cider Vinegar, which features a masterly performance from Dopesick’s Kaitlyn Dever as the wellness influencer Belle Gibson, who built a lucrative empire on the back of her story about supposedly beating terminal brain cancer via healthy living. As we are told near the start of every episode of the six-part series: “This is a true story based on a lie.” Apple Cider Vinegar does an artful job of layering revelations about Gibson’s past with her current actions, so that while we can never fully sympathise with her, we can never enjoy her as a pure villain either. It’s a fast, drily witty, acutely intelligent, compassionate and furious commentary on greed, need, mass delusion, self-deception, the exploitation of the credulous, and the enabling of insidious new forms of all of these by technology. Lucy Mangan

Book
We Do Not Part by Han Kang
There are books in a writer’s life that gather all their previous themes and explorations in a great act of creative culmination, which both surpasses what had gone before and makes it more clear. We Do Not Part is one of those books. Published last year in Swedish translation, it helped to secure Korean writer Han Kang the 2024 Nobel prize in literature. The narrator of We Do Not Part, Kyungha, is fragile and resilient. She finds it hard to sleep or eat, suffers from summer heat and winter cold, and endures terrible physical suffering for reasons that can be hard to understand. Each new movement is a shift in consciousness as the novel moves, not around some central mystery (why will Yeong-hye not eat?), but relentlessly towards a terrible historical truth. In order to open her character to the facts, Han needs to break her first, pushing her through suffering and difficulty into a new psychic space. Few writers are so unremitting on the subject of pain, which is, for Han, the truth of our mortality. We Do Not Part is an astonishing book. Anne Enright

Today in Focus

Cartoon of the day | Ben Jennings

The Upside

A bit of good news to remind you that the world’s not all bad

Sundus Abdi’s experiences growing up in a family of refugees engrained in her a sense of caution towards strangers. “My parents instilled in me the idea that trust had to be earned,” she explains. “As I got older, their anxieties became my own.”

So when Sundus was approached by two complete unknowns, asking if she and her friend would be impromptu witnesses at their wedding in a city she had never previously visited, she immediately felt suspicious. But what followed wouldn’t only just make the happy couple’s day, but help Sundus see life and the world around her in a different light.

Sign up here for a weekly roundup of The Upside, sent to you every Sunday

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