A series of interest rate cuts are likely this year to help the UK avoid a recession, said the Bank of England.

Its latest forecast came after its monetary policy committee voted to cut interest rates, as widely expected, from 4.75% to 4.5% and downgraded its economic outlook.

Two of the nine-member committee wanted to reduce bank rate by 0.5 percentage points, to 4.25%, a signal of the level of concern about the economy.

Its decision came amid speculation that the UK could heading for a period of ‘stagflation’, a mix of rising inflation and low growth. It has downgraded its growth forecast from 1.5% to 0.75%.

At a press conference, the Bank’s governor Andrew Bailey said the committee will consider cutting rates again soon.

“We expect to be able to cut bank rate further as the disinflation process continues, but we will have to judge meeting by meeting, how far and how fast,” he said.

However, he added: “We live in an uncertain world, and the road ahead will have bumps on it.”

The MPC has predicted that the economy shrank between October and December – first estimates will come out next week – and will grow only marginally in the first three months of this year.

Inflation is also expected to “rise quite sharply” later this year due to higher water bills, bus fares and energy costs and take longer to fall back to the Bank’s 2% target.

The committee said there has been substantial progress on disinflation over the past two years which has allowed the MPC to withdraw gradually some degree of policy restraint

Inflation currently stands at 2.5% but higher global energy costs and regulated price changes are expected to push it to 3.7% in the third quarter of this year, even as underlying domestic inflationary pressures are expected to wane further.

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

The FTSE 100 hit a new record, closing 103.99 points (1.21%) higher at 8,727.28. The pound fell more than 1.1% against the dollar before recovering to about 0.6% down at the close of trading, at $1.244. On Wall Street the S&P 500 and Nasdaq gained 0.4% and 0.5% respectively – rising for the third straight session – but the Dow declined 0.3%

The latest retail figures provided some encouragement, revealing that footfall rose in January, although the boost was thought in part to be due to Brits delaying festive spending in favour of discounted goods in the new year sales.

Footfall rose by 6.6% last month compared with 2024 in all UK retail destinations. It was up 1% in Scotland which was hit by storms. Across the UK there was a 7.4% boost in shopping centre footfall (2.2% in Scotland), a 7.9% rise in retail parks (5.7% in Scotland) and a 4.5% rise in high streets.

AJ Bell head of financial analysis Danni Hewson, said: “The latest interest rate cut from the Bank of England might come with warnings about weak growth and the unpleasant return of higher prices, but today investors were happy to look past that and focus instead on the prospect of more cuts this year than had previously been priced in.

“But although the FTSE 100 is smashing records, the more domestically focused FTSE 250 is still way down near the highs it experienced post-Covid, which signals the ongoing weakness in the UK economy.”

The government has made growing the economy one of its key policies, and last week Chancellor Rachel Reeves announced a number of potential projects and changes to planning rules to boost the UK’s performance.

She said the interest rate cut will “help to ease the cost of living pressures felt by families across the country and making it easier for businesses to borrow or grow.

“However, I am still not satisfied with the growth rate. Our promise in our Plan for Change is to go further and faster to kickstart economic growth to put more money in working people’s pockets.

“That’s why we are taking on the blockers to get Britain building again, ripping up unnecessary regulatory barriers and investing in our country to rebuild roads, rail and vital infrastructure.”

Luke Bartholomew, deputy chief economist at abrdn, said: “The decision to cut rates today was widely anticipated. But the fact that two MPC members voted to deliver a bumper 50bps cut, despite revising up near term inflation forecasts, gives a sense of how concerned some policymakers are about the headwinds to growth.

“It is hard to see the Bank of England materially stepping up its pace of easing until it sees how the increase in National Insurance is digested by the economy in the spring.

“However, the Bank’s signals today suggest there is scope for several more rate cuts this year, given the weak growth outlook, and we continue to see rates below 3% over the next two years.”

Alpesh Paleja, deputy chief economist at the CBI, said: “The Monetary Policy Committee are increasingly having to balance conflicting objectives.

“Therefore, while we still expect a few more rate cuts this year, risks to this forecast are now balanced in either direction. Incoming data over the coming months will be key in determining how the MPC will move next.”

Greig Brown, Aberdein Considine mortgage director, said: “This news will be welcomed by mortgage holders, with the 629,000 people in the UK currently on a ‘tracker’ mortgage set to benefit from reduced payments.

“For those who already hold a mortgage, the advice would be to act early, speak to a mortgage broker or your lender six months before your current mortgage deal expires.

“Although rates may come down further, expectation is that house prices will continue to rise, as will competition for properties. So any saving on your mortgage could be outweighed by having to pay more for your dream home.”