Sluggish growth and rising prices: Can Reeves get the UK out of this mess?

Read time: 4-5 minutes

In brief:

• The Bank of England has halved UK growth forecasts and raised inflation predictions for 2025, indicating serious concerns about economic stagnation.
• The Bank of England Governor has pointed to Chancellor Rachel Reeves' decision to increase employers' national insurance contributions as one cause for the lack of growth.
• While facing significant economic challenges, sources strongly reject speculation about her job being at risk, describing rumors of her potential dismissal as "absolute rubbish."

What’s the story?

“If you're Rachel Reeves, you won't be cracking open a bottle of bubbly this lunchtime,” Jon Sopel says after hearing the latest gloomy news about the UK economy.

The Bank of England has halved its UK growth forecasts for the year and warned that households won’t feel any much-needed relief from living costs in the foreseeable future - meaning it’s probably best for the rest of us to also put the bubbly back on the shelf.

The latest 2025 growth forecast has been announced as 0.75%, down from 1.5% in its last scheduled forecast in November - and that’s not the only bad news.

In the same November report, inflation for the year was estimated to average at 2.75%, which has now been increased to 3.5% - a more palatable number compared to its 11% peak during Covid but still higher than the bank’s 2% target.

But it’s good news for borrowers, as the need for increased spending to boost the economy has seen The Bank of England cut interest rates from 4.75% to 4.5% - the lowest it's been since June 2023.

This is not what you’d usually expect from The Bank of England, Lewis Goodall explains.

“Looking at an inflationary forecast which is getting towards 4%, way above the 2% target, you would expect the Bank of England to be raising interest rates rather than decreasing them.

“But they're not, and they're not doing so because growth in the economy is so sluggish… It's a nightmarish picture.”

Responding to the developments the Chancellor said the interest rate cut will “help ease” cost of living pressures, but she is still “not satisfied with the growth rate”.

These figures don’t take into account Donald Trump’s potential tariffs on the UK, which he has said are coming. The Bank of England has said that if - or when - the tariffs come, they will pose a further risk for economic growth at home.

The Chancellor set out several economic growth plans in a speech last week, including support for a third runway at Heathrow, regeneration of Old Trafford and a new "Oxford-Cambridge growth corridor" aimed at creating Europe's Silicon Valley.

But those are long-term projects and it appears there are few short-term levers she’s able to pull to get the UK economy growing again any time soon.

What’s The News Agents’ take?

“For all Rachel Reeves talking up the economy and setting out a path for growth, Britain is mired by sluggish growth and rising prices - the deadly combination,” Jon says.

Reeves and Starmer were not shy in blaming the economy’s woes on the previous Conservative government - we’ve heard the £22 billion black hole line time and time again.

Some of that was “justified,” Jon says.

“But there is this list of problems where Rachel Reeves cannot turn around and say, ‘well, that's the fault of the previous Conservative government’.

Andrew Bailey, the governor for The Bank of England, has pointed at the decisions Reeves has made since becoming Chancellor, including the increase to employers' National Insurance contributions, saying that it would hit jobs and prices more than expected.

“The Bank of England governor is saying; ‘Well, hang on, what's happened is that consumer confidence has declined. Business confidence has declined. The cost of employing low earners will rise by 5% because of the national insurance rise for employers. And so it goes on,’ Jon explains.

The decision to cut interest rates is made by the MPC (Monetary Policy Committee), with nine people getting a vote. In this instance, seven voted for the cut from 4.75% to 4.5% - the other two didn’t want to increase interest rates, or keep them stable - they wanted to cut them even further.

The fact two out of the nine MPC voters wanted to go "further and faster,” Lewis says, shows how “concerned the Bank of England is about where the economy is heading”

As for Reeves?

Rumours that the Chancellor is at risk of being sacked by Keir Starmer made an appearance in the press today, but Emily’s sources tell her it’s “absolute rubbish.”

Jon agrees that it would be “surprising,” because Reeves and Starmer are so closely tied together with decision making. However, he says there could be a “grain of truth in it.”

“It could be that there are people who are starting to think that maybe the problem is Rachel Reeves as the head of the Treasury, and therefore maybe we're never going to be able to turn it around, while Rachel is the front figure.”

But whether Reeves remains or leaves, the current economics remains the same. So the key question really, is, if the forecast for growth is this bad, what happens next - tax rises or spending cuts?

Neither are aligned with Reeves’ fiscal rules.

“If she's not going to borrow more and she's not going to tax more, we'll face even more severe cuts in non protected government departments than we've seen,” Lewis says.

“And the politics of that, both in the country, but crucially, inside the parliamentary Labour Party, could be absolutely torturous.”

Listen to the latest episode of The News Agents.