Stay informed with free updates
Simply sign up to the UK interest rates myFT Digest — delivered directly to your inbox.
The Bank of England cut interest rates to 4.75 per cent but signalled that a further move is unlikely before early 2025, as it forecast that last week’s UK Budget would increase inflationary pressures.
The Monetary Policy Committee’s eight-to-one decision to cut its key rate by 0.25 percentage points was in line with the expectations of economists polled by Reuters and came after inflation fell to a three-year low.
The BoE kept rates on hold at its previous meeting in September, following a reduction in August.
“We need to make sure inflation stays close to target, so we can’t cut interest rates too quickly or by too much,” said BoE governor Andrew Bailey on Thursday.
“But if the economy evolves as we expect, it’s likely that interest rates will continue to fall gradually from here,” he added.
Inflation hit 1.7 per cent in September, the first time it has dipped below the BoE’s 2 per cent target since 2021, but the central bank expects it to increase in coming quarters.
The pound rose after the decision, up 0.8 per cent on the day against the dollar at $1.298 by late afternoon, as the greenback lost some ground after its US election result rally.
This week’s decision suggests the BoE is taking a cautious approach to lowering rates as it weighs the impact of the Budget, in which UK chancellor Rachel Reeves increased taxes and loosened fiscal policy.
The outlook has also been affected by Donald Trump’s victory in this week’s US election, particularly because of his support for higher tariffs, which many economists argue could stoke inflation.
The BoE said the Budget would increase consumer price inflation by just under 0.5 percentage points at its peak compared with previous projections, as well as boosting GDP by 0.75 per cent in a year’s time.
The inflation outlook prompted traders to trim their expectations of a further quarter-point cut at the BoE’s next meeting in December from about 30 per cent to about 20 per cent, according to levels implied in swaps markets.
Hussain Mehdi, a strategist at HSBC Asset Management, said he now expected a “fairly shallow easing cycle” that would put upward pressure on bond yields, in part due to the Budget’s impact on inflation.
Partly as a result of the Budget, the BoE considers that inflation will now take longer than previously expected to return to target, reaching 2.2 per cent in two years’ time before falling to 1.8 per cent by the end of the following year.
The BoE also predicted that growth will pick up from 1 per cent this year to 1.5 per cent in 2025, before easing back to 1.25 per cent in 2026.
In an indication of the Budget’s impact on UK businesses, J Sainsbury warned on Thursday that Reeves’ changes would be “inflationary”, as it complained that they would subject it to an “unexpected” and “significant” £140mn “barrage of costs”.
BT also described the Budget as a “new inflationary pressure”, as it said it would now be hit by a £100mn increase in costs.
The Budget unveiled a £40bn increase in taxes, most of which will come from national insurance paid by employers. It also boosted government borrowing by an average of £28bn a year over the course of the parliament.
The BoE said on Thursday that the higher employer NI contributions and an accompanying increase in the national living wage were likely to increase the overall costs of employment.
But it added that their inflationary impact would depend on the extent to which firms pass the extra costs on to consumers.
In a press conference following the rate announcement, Bailey said that the BoE would take “a gradual approach” to future cuts as it waited to see how price pressures developed.
He added that the UK had made more progress lowering inflation than had been expected a year ago, but refused to offer more specifics on the pace of future rate cuts.
The minutes of this week’s meeting acknowledged “significant uncertainty around the labour market outlook and its impact on inflationary persistence”, and added that labour market indicators remain relatively tight.
The MPC did not explicitly refer to Trump’s return to power, but the minutes noted “upside risks” to goods and commodity prices from greater trade fragmentation, as well as because of events in the Middle East.
Asked about the prospect of escalating trade tensions once Trump returns to the White House, Bailey said the BoE would not be making any assumptions about what will happen.
“We will wait and see,” he said. “I do think we have to watch very carefully the fragmentation of the world economy.”