Bank of England cuts rates to 4.75%, warns on Reeves’ budget
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The news: The Bank of England (BoE) cut interest rates by 0.25 percentage points to 4.75%, in line with expectations, but warned the new government’s fiscal policies will likely keep UK inflation above its 2% target for longer than anticipated.
The numbers: The move, supported by eight out of nine Monetary Policy Committee members, will ease borrowing costs amid lower inflation, which dropped to 1.7% in September.
The pound rose 0.5% after the announcement, as traders pared bets on further cuts.
The context: The bank said inflation was expected to rise above the target due to increased energy prices and Chancellor Rachel Reeves’ new budget.
The budget, including a £70 billion ($136.46 billion) annual increase in spending largely funded by borrowing and higher employer national insurance contributions, would add 0.5 percentage points to inflation and 0.75% to GDP, it estimated.
The BoE anticipates inflation to reach 2.75% mid-2025, peaking at 2.8% in Q3, and returning to 1.8% by 2027.
Governor Andrew Bailey then said further cuts would be gradual to control inflation, adding, “we can’t cut interest rates too quickly or by too much.”
The task of controlling inflation will also likely be further complicated by the potential impacts of a Trump administration in the US, a major trading partner. Trump’s planned tariffs could drive global inflation and lower economic growth.
But at a press conference after the announcement, Bailey would not be drawn to comment on the impact of the expected Trump tariffs, saying “we always respond to announced policies… not to stories about what they might be”.
“I am not going to make any presumptions about what will happen. Let’s see what happens."
What they said: “We need to make sure inflation stays close to target, so we can’t cut interest rates too quickly or by too much,” Bailey said. “But if the economy evolves as we expect, it’s likely that interest rates will continue to fall gradually from here.”
Chancellor of the Exchequer Rachel Reeves said: “Today’s interest rate cut will be welcome news for millions of families, but I am under no illusion about the scale of the challenge facing households after the previous government’s mini-budget.”
“This government’s first budget has set out how we are taking the long-term decisions to fix the foundations to deliver change by investing in the NHS and rebuilding Britain, while ensuring working people don’t face higher taxes in their payslips.”
JPMorgan Asset Management global market analyst Zara Nokes said: “The pace of cuts from here has been muddied by recent political developments. The UK economy is now contending with a number of cross-currents which make the growth and inflation outlook highly uncertain.”
