On Thursday, the Bank of England reduced interest rates by a quarter-point to 4.75% but warned that inflationary pressures from the government’s latest budget would slow the pace of future rate cuts. The central bank’s monetary policy committee (MPC) voted 8-1 in favor of the cut, marking the second rate reduction this year. However, the Bank cautioned that Chancellor Rachel Reeves’s £70 billion spending plan, which includes higher taxes and borrowing, would add to inflation and economic growth.
The Bank’s updated forecast predicts inflation will peak at 2.75% by mid-2024 and remain above its 2% target until 2027. This longer timeline for achieving stable inflation and the government’s policies are expected to keep rates falling gradually. The impact of higher national insurance contributions, the national living wage, and measures like higher bus fares and VAT on private schools could further exacerbate inflation, prompting one MPC member to argue against rate cuts.
While the rate cut is seen as a relief for households facing high borrowing costs, personal finance experts warn that the slower pace of rate reductions will delay any significant relief for mortgage borrowers. The Bank’s governor, Andrew Bailey, reiterated that while rates are likely to fall in the future, a careful approach is necessary to ensure inflation remains under control.
The broader economic uncertainty, compounded by global risks and potential U.S. policy changes under President-elect Donald Trump, also played a role in the Bank’s cautious outlook.
