The Bank of England is poised to cut interest rates today – but could signal that the big-spending Budget will keep borrowing costs higher in future.
Markets are expecting the Monetary Policy Committee to reduce the base rate from 5 per cent to 4.75 per cent at its latest meeting.
There had been optimism about swift falls after governor Andrew Bailey suggested that the Bank could be ‘aggressive’ if inflation remained on the right path.
However, many analysts now believe it will be a split decision – and another cut before Christmas looks unlikely.
The crucial moment comes after Chancellor Rachel Reeves splurged on the public sector by pumping hiking taxes in her fiscal set-piece last week.
The huge package has spooked gilts markets, increasing borrowing costs for the government.
And the OBR watchdog responded by predicting that both inflation and interest rates will stay elevated for longer.
Bank governor Andrew Bailey had suggested that it could be more ‘aggressive’ about rate cuts if CPI continued to subside
The bombshell victory for Donald Trump in the US elections could also factor in the Bank’s thinking. The returning president has vowed to impose tariffs on imports to America, sparking fears of a blow to global growth.
With experts already trimming forecasts for UK plc, Ms Reeves said yesterday she would be appealing to the Trump administration not to go ahead with tariff increases.
The Chancellor told MPs said she would make ‘strong representations’ to the president-elect about the damage a protectionist regime would inflict.
Threadneedle Street’s decision could be swayed by grim figures this week showing growth in the UK services sector slowing to its lowest rate in nearly a year.
The closely-watched S&P Global UK services PMI survey scored 52.0 in October, slowing from 52.4 in September.
It was slightly below the 51.8 reading forecast by a consensus of economists.
Any reading above 50 means a sector is in growth, while a score below this means it is shrinking.
Tim Moore, economics director at S&P Global Market Intelligence, said: ‘October data signalled another slowdown in output growth across the service sector as heightened business uncertainty and concerns about the general UK economic outlook had an adverse impact on demand conditions.
‘The latest expansion of service sector activity was the weakest since November 2023, while new business growth slipped to a four-month low.
‘The wait for clarity on Government policy ahead of the autumn Budget was widely reported to have weighed on business confidence and spending.’
Input cost inflation, mainly driven by higher wages, rose to a three-month high, businesses reported, but remained softer than in the first half of the year.
Price inflation edged up, but stayed close to its 43-month low recorded in September.
Services sector inflation has been a closely watched metric for policymakers at the Bank of England, who meet this week.
Policymakers are expected to cut the base interest rate by a quarter point, following a dip in the headline rate of inflation.
Mr Moore continued: ‘Broader geopolitical concerns and forthcoming US elections also added to a sense of wait-and-see on business investment decisions in October.
‘At the same time, cost-of-living pressures remained a constraint on household spending.
‘With service providers grappling with softer new order growth and less upbeat business activity expectations for the year ahead, the latest survey pointed to a decline in staffing numbers for the first time since December 2023.
‘A number of firms also noted budget constraints due to elevated salary pressures.
‘Higher wages resulted in another month of strong input cost inflation across the service economy.’