- The Bank of England cut interest rates for only the second time since 2020.
- “We need to make sure that inflation stays close to target,” the governor says.
- Rachel Reeves’ Budget is expected to boost the size of the UK economy.
The Bank of England cut interest rates on Thursday for only the second time since 2020, and said future cuts were likely to be gradual, with inflation and growth rising after the new government’s first budget.
The Monetary Policy Committee voted 8 to 1 in favor of cutting interest rates to 4.75% from 5%, a stronger majority than expected in 2018. Reuters The poll had a 7-2 vote in favor of the cut. Katherine Mann opposed, preferring to keep interest rates unchanged.
“We need to ensure that inflation remains close to target, so that we cannot cut interest rates too quickly or too much,” Bank of England Governor Andrew Bailey said in a statement.
“But if the economy develops as we expect, interest rates are likely to continue to fall gradually from here,” he added, widely echoing his tone after the September meeting.
The Bank of England predicted that Finance Minister Rachel Reeves’ budget last week – which entails big rises in taxes, spending and borrowing – will boost the size of the British economy by about 0.75% next year but will hardly improve annual growth rates within two or three years. .
The Bank of England said its plan would likely add just under half a percentage point to the inflation rate at its peak in just over two years, causing inflation to take a year longer to sustainably return to its 2% target.
The Bank of England’s cautious language on future interest rate cuts was similar to previous months, in line with investors’ view that it is likely to cut interest rates more slowly than the European Central Bank.
The Bank of England did not indicate that Donald Trump would win the US elections, which led to a significant decline in bets that the Fed would cut interest rates aggressively.
Financial markets on Wednesday priced between two and three interest rate cuts from the Bank of England in 2025 – down from around four before the Budget.
The Bank of England said that inflation is likely to rise to about 2.5% by the end of this year from 1.7% in September, and reach 2.7% by the end of next year, before gradually falling below its target of 2% by the end of the three years. . Climate prediction.
Government decisions to raise maximum bus fares, increase value-added tax on private school fees, and increase employer contributions to social security are likely to increase inflation.
Combining the latest measure with a 6.7% rise in the national minimum wage, the Bank of England said employers face rising costs – although the overall impact on inflation cannot be ascertained as employers may respond by sacking staff or accepting lower profits.
While the Bank of England cut its forecast for average economic growth this year to 1% from 1.25%, reflecting recent revisions to previous growth, it raised its forecast for 2025 to 1.5% from 1%.
“This reflects the relatively stronger and forward paths for government consumption and investment more than offsetting the impact of higher taxes on growth,” the Bank of England said.
While the Bank of England’s growth and inflation forecasts include the impact of higher spending and taxes, they do not include the impact of the sharp rise in market borrowing costs since the Budget, as it set those assumptions in advance and has not updated them.
If the now high market interest rates are taken into account, inflation and growth expectations are likely to be slightly lower.
The Bank of England reiterated its message that monetary policy would need to remain “constrictive for a sufficiently long period” to sustainably return inflation to the 2% target.