The Bank of England’s decision to cut interest rates to 3.75% has not altered the grim international forecast for the UK. The International Monetary Fund (IMF) and other independent bodies continue to predict that Britain will suffer the highest inflation among the G7 major economies for the next two years. This “outlier” status highlights the unique structural challenges facing the UK compared to peers like the US, Germany, and Japan.
While other nations are seeing inflation return to target rapidly, the UK is dealing with a potent mix of energy dependency, labor shortages, and trade friction. This stickiness forces the Bank of England to keep rates relatively high compared to the cuts expected from the Federal Reserve and the ECB. The 3.75% rate is a relief domestically, but internationally, it leaves the UK looking vulnerable.
The “doves” on the MPC argued that despite this comparison, the domestic risk of recession was too high to ignore. They chose to cut rates to save the UK economy from contracting further, accepting that inflation might stay higher than in other countries for a bit longer. It is a trade-off between growth and international bragging rights on price stability.
For British consumers, being the G7 outlier means their purchasing power recovers slower than that of French or American shoppers. It also means the pound could remain volatile as currency traders assess the diverging paths of the world’s central banks. If the Bank of England cuts too fast while inflation is still top of the G7 league table, the pound could crash, importing yet more inflation.
The government is keen to downplay this international comparison, focusing instead on the domestic “fastest pace of cuts” narrative. But the IMF’s data is a stubborn reminder that the UK’s economic health is lagging behind its global competitors, a gap that a 0.25% rate cut can’t bridge on its own.