The Bank of England (BoE) has cut interest rates from 4.75 per cent to 4.5 per cent, marking the third cut since the bank started to bring interest rates down from a peak of 5.25 per cent last August.

At its latest meeting, the BoE’s Monetary Policy Committee (MPC) voted by a majority of seven to two to reduce the base rate by 0.25 percentage points, to 4.5 per cent, with the two remaining MPC members instead in favour of a 0.5 percentage point reduction, to 4.25 per cent.

The MPC's report said that there has been "substantial" progress on disinflation over the past two years, as previous external shocks have receded, and as the restrictive stance of monetary policy has curbed second-round effects and stabilised longer-term inflation expectations.

However, the MPC acknowledged that whilst domestic inflationary pressures are moderating, they remain somewhat elevated, and some indicators have eased more slowly than expected.

It also noted that higher global energy costs and regulated price changes are expected to push up headline CPI inflation to 3.7 per cent in 2025 Q3, even as underlying domestic inflationary pressures are expected to wane further.

While CPI inflation is expected to fall back to around the 2 per cent target thereafter, the MPC said that it will pay close attention to any consequent signs of more lasting inflationary pressures.

The committee also admitted that GDP growth has been weaker than expected at the time of the November report, and indicators of business and consumer confidence have declined, although it suggested that GDP growth is expected to pick up from the middle of this year.

In particular, the committee said that growth in the supply capacity of the economy has weakened and, as a result, the recent slowdown in demand is judged to have led to only a "small margin of slack opening up".

The decision to cut the base rate was hailed as a "significant" moment by industry experts, with Barnett Waddingham chief investment officer, Matt Tickle, highlighting the messaging from BoE as demonstration of the ongoing challenges for the UK economy.

Adding to this, LCP investment team partner, Chris Helyar, said: “With the economy seemingly flat on its back in the final months of 2024 and business confidence at a low ebb, the MPC probably felt it had little option but to apply a dose of monetary medicine.

"But looking a little further out, it’s fair to say, decision making is likely to get complicated.

“For a variety of reasons, such as rising energy costs and the potential pass through to consumer prices of Chancellor Reeves’ employer National Insurance hike, inflation could be rising and well above the 2 per cent target again soon. The combination of no / slow growth and pricing pressures would make for a head scratching monetary conundrum.

“And that’s before the MPC considers the impact of possible US trade tariffs."

However, some have been able to mitigate against market challenges, as Tickle said that "a number of our clients were able to take advantage of January’s spike in yields to implement additional hedging".

"With yields already falling and the indications today from the BoE about the future path of rate cuts, they have already felt material benefit from those decisions," he added.

And Quilter Investors investment strategist, Lindsay James, said that whilst "the economic picture has undeniably worsened in recent months, so too pockets of optimism remain".

In particular, James suggested that, for investors, this situation does present somewhat of a silver lining.

"With expectations already so low, UK equities, which have outshone the returns from the US year to date, continue to earn their place in portfolios," she explained.

However, Quilter financial planner, Holly Tomlinson, acknowledged that the base rate cut could lead to less favourable annuity rates for retirees, if it leads to lower bond yields.

"Annuity rates are closely tied to government bond yields, which can be affected by interest rate changes," she explained, suggesting that those approaching retirement should seek financial advice to assess the best timing for purchasing annuities and consider alternative retirement income strategies where appropriate.

But Hargreaves Lansdown head of retirement analysis, Helen Morrissey, argued that the latest interest rate cut will "likely do little to dampen demand with annuities expected to deliver great value to retirees for some time yet".

“The fortunes of the annuity market have been transformed in recent years with incomes hovering just below all-time highs," she continued.

"The latest data from the HL annuity search engine shows a 65-year-old with a £100,000 pension can get up to £7,492 per year from a single life level annuity with a five-year guarantee."

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