The Bank of England has cut interest rates by 0.25 percentage points to 4.75%, as expected by financial markets in advance of the meeting. The central bank has reacted to falling inflation, but the recent Oct. 30 Budget has made the rate-cutting trajectory more uncertain heading into 2025.
This is the second rate cut in the UK loosening cycle, after the decision in August 2024. Other European central banks such as the ECB, SNB and Swedish Riksbank have already reduced rates multiple times already this year. The Bank’s move comes ahead of the Federal Reserve decision tonight, when the US central bank is forecast to cut rates by 0.25 percentage points.
After last week’s Budget, markets are now assuming that heightened UK government spending may be inflationary, forcing the Bank of England to slow the expected path of rate cuts. Bond markets reacted negatively to the taxation, spending and debt plans of the new government, pushing gilt yields higher.
The Bank is, though, focused squarely on inflation, which has fallen dramatically from over 11% to below 2%, the official target level, after a tightening in monetary policy from 0.1% to 5.25% over two years.
Investors are keen to keen more detail on how the Budget has affected the Bank’s forecasts, which will be revealed in the upcoming press conference.
Will UK Inflation Now Rise Again?
The Bank of England meeting this week involves an element of catch-up; there was no monetary policy meeting in October, so the last official announcement was on Sep. 19, when interest rates were held. After that, the next interest rate meeting is in December, and the first of 2025 will be held in February.
At the September meeting, the Bank said “a gradual approach to removing policy restraint remains appropriate”—a mantra that is likely to be repeated at the press conference on Thursday.
Since September we’ve had the Budget on Oct. 30 and a weaker-than-expected inflation reading for September, in data released on Oct. 16.
In that October release, the Office for National Statistics said CPI increased by 1.7% year on year, against forecasts for a 1.9% rise. Data for October will be released on Nov. 20, when CPI is forecast to have risen by 2.2%.
Among many other economic forecasts by the Office for Budget Responsibility unveiled at the Budget, inflation predictions stood out.
Not only were these higher than the March 2024 report, which was produced for the last Conservative Budget, they were higher because of the “direct and indirect impact” of the chancellor’s plans. Average CPI for 2025 is now expected to be 2.6%, compared to forecast for 1.5% just eight months ago. Inflation remains above target in 2026, 2027 and 2028, because of persistent wage growth and fiscal loosening.
UK fiscal and monetary policy is separate because of the Bank of England’s independence from central government, a separation that occurred in 1997. Since then, the government has had no official influence on interest rates.
At the same time, the new government’s fiscal plans will have a direct bearing on the Bank of England’s decisions, as well as its forecasts for economic growth and inflation in the coming years. The November interest rate decision will also be accompanied by the quarterly monetary policy report, where we will hear more detailed analysis of the likely impact of the government’s fiscal path.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.
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