Jamie Spencer
The Bank of England (BOE) cut interest rates by 25 basis points on Thursday, bringing the central bank’s key rate down to 4.75%. This move, supported by an 8-1 vote from the Monetary Policy Committee (MPC), marks the second rate reduction this year, following the start of the bank’s easing cycle in August.
Inflation and Growth Projections Revised Upward
While the decision was driven by a continued easing of inflation, the BOE also cited the government’s fiscal policies as a reason to revise its growth and inflation forecasts. Following Labour’s £40 billion tax-and-spend budget, the central bank now anticipates inflation to increase by 0.5 percentage points more than previously expected, reaching a peak of around 2.75% next year before falling back to its 2% target. The BOE also projects growth to rise by approximately 0.75% in a year.
BOE Governor Andrew Bailey emphasized the need for caution, stating that monetary policy must remain restrictive until inflation risks subside. “Monetary policy will need to remain restrictive for sufficiently long until the risks to inflation returning sustainably to the 2% target over the medium term have dissipated further,” Bailey said during a press conference.
Labour Budget Adds Complexity to Policy
Analysts had largely anticipated the rate cut, with money markets pricing in a 97% probability of a quarter-point reduction ahead of the November meeting. However, the U.K. Finance Minister Rachel Reeves’ budget announcement, which included £40 billion in tax hikes and changes to the U.K.’s debt rules, complicated the outlook for future easing.
The Office for Budget Responsibility (OBR) noted that the fiscal plan could drive near-term growth and inflation upward, leading some economists to suggest that further rate cuts may be less aggressive than previously thought. “Even though interest rates have further to fall, the upward pressure on inflation from the budget and growing global risks, including possible new U.S. tariffs, could mean that policy is loosened more modestly than many anticipated,” said Suren Thiru, economics director at ICAEW, in a post-decision note.
Policy Outlook and Market Reactions
The BOE had previously indicated a cautious stance after holding rates steady in September. However, expectations of a quicker easing path were initially spurred by declining inflation to 1.7% and slowing wage growth. These expectations shifted following the government’s fiscal moves, which have introduced fresh challenges for the bank’s approach to policy easing.
The future trajectory of interest rate cuts now appears uncertain as the BOE navigates inflation pressures influenced by domestic fiscal policy and potential global economic risks.
