Bank of England cuts interest rates to 4.75%

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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 BoE governor Andrew Bailey 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 strengthened after the decision, up 0.5 per cent on the day against the dollar at $1.294. 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 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.

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.

The inflation outlook 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.

Hussain Mehdi, a strategist at HSBC Asset Management, said he now expected a “fairly shallow easing cycle” that would put upward pressure on bond yields, in part due to the Budget’s impact on inflation.

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 central bank 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.

In an indication of the Budget’s impact on UK businesses, J Sainsbury warned on Thursday that Reeves’ changes would be “inflationary”, as it complained that they would subject it to an “unexpected” and “significant” £140mn “barrage of costs”.

BT also described the Budget as a “new inflationary pressure”, as it said it would now be hit by a £100mn increase in costs.

The Budget unveiled a £40bn increase in taxes, most of which will come from national insurance paid by employers. It also boosted government borrowing by an average of £28bn a year over the course of the parliament as Reeves increases.

The BoE 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.