The Bank of England is expected to lower interest rates this week, while markets are betting on fewer cuts next year after forecasts suggested the new government’s first Budget will push up inflation.
Analysts predict members of the Monetary Policy Committee (MPC) will vote to cut the central bank’s base rate by a quarter-point to 4.75 per cent at their next meeting on Thursday.
Official figures last month boosted hopes of a cut as inflation fell to 1.7 per cent, its lowest level since April 2021, and stickier services inflation also dropped.
Meanwhile, data showed wage growth eased again to its lowest level in two years. Average pay growth, excluding bonuses, fell to 4.9 per cent in the three months to August, down from 5.1 per cent in the previous quarter.
The Bank cut rates in August for the first time since March 2020 but opted to leave them on hold in September.
Policymakers appear to be taking a cautious approach to easing monetary policy, with inflation expected to rise over the coming months amid increases in household energy prices and oil price shocks caused by conflict in the Middle East.
Another cut in December is therefore considered unlikely, and the Budget has spurred markets to further dial back their expectations.
Investors now predict fewer than four quarter-point cuts next year, compared to almost five before the Autumn Statement.
The Office for Budget Responsibility (OBR) said last week that the sharp increase in spending from the Budget would contribute to higher inflation and put pressure on interest rates.
Chancellor Rachel Reeves announced nearly £70bn of extra annual spending, funded by tax hikes focused on businesses and additional borrowing.
“Though a November interest rate cut looks nailed on, the upward pressure on inflation from higher business costs resulting from the Budget may mean that the rate cutting cycle over the next year is slower than many expect,” Suren Thiru, economics director at the ICAEW, told City AM.
Thomas Pugh, an economist at the consultancy RSM, said: “We doubt the MPC will want to signal that faster rate cuts are on the way.
“After all, there is a significant split on the committee between doves and hawks, and the Budget has changed the outlook for inflation next year.”
The OBR predicts inflation to average 2.5 per cent this year and 2.6 per cent in 2025 before coming down, assuming “the Bank of England responds”.
“Any reaction to the Autumn Budget will be carefully pored over as part of the November forecast round,” said Sanjay Raja, chief UK economist at Deutsche Bank.
“Indeed, the MPC will have had the chance to fully digest the contents of the Budget, incorporating it fully into its projections.”
Dani Stoilova and Joshua Wilcock, of BNP Paribas, expected the updated projections to “include higher growth and inflation forecasts for 2025, especially if they incorporate the Autumn Budget announcements”.
Elsewhere, the US Federal Reserve is also expected to lower rates by a quarter-point on Thursday as officials’ preferred measure of inflation nears its two per cent target.
The year-on-year increase in the personal consumption expenditures index came in at 2.1 per cent in September, down from an upwardly revised 2.3 per cent in August.