The Bank of England has cut interest rates to 4.75 per cent after inflation fell to a three-year low in September, as it signalled that a further move is unlikely before early 2025.
The Monetary Policy Committee’s eight-to-one decision to cut the base rate by 0.25 percentage points was in line with the expectations of economists polled by Reuters.
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 Andrew Bailey, the BoE governor, 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.
The pound rose slightly after the decision, up 0.4 per cent on the day against the dollar at $1.293. The 10-year gilt yield was steady at 4.55 per cent.
This week’s decision suggests the BoE is taking a cautious approach to lowering rates as it weighs the impact of Chancellor Rachel Reeves’ budget last week, which loosened fiscal policy.
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.
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 BoE expects it to increase in coming quarters.
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.
That forecast 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.
The bank 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.
The budget boosted government borrowing by an average of £28bn a year over the course of the parliament as Reeves increases spending on public services.
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. - Copyright The Financial Times Limited 2024
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