The Bank of England (BoE) cut interest rates on Thursday for the second time since 2020 and said future reductions would likely be gradual, seeing higher inflation and growth following the new British government’s first budget.
The Monetary Policy Committee voted 8-1 to cut interest rates to 4.75% from 5%, a stronger majority than expectations in a Reuters poll for a 7-2 vote in favor of a cut. Catherine Mann disagreed and preferred to maintain the rates.
“We need to ensure that inflation stays close to target, so we cannot cut interest rates too quickly, or too much,” BoE Governor Andrew Bailey said in a statement. “But if the economy develops as we expect, interest rates are likely to continue to gradually decline from now on,” he added, echoing his speech after the September meeting.
The Bank of England predicted that the budget presented last week by Chancellor Rachel Reeves (which involves big increases in taxes, spending and borrowing) would boost the size of the UK economy to around 0. 75% next year, but it would barely improve annual growth rates in two or three years.
His plan would likely add just under half a percentage point to the inflation rate at its peak in just over two years, according to the BoE, causing it to take another year for inflation to sustainably return to its target of 2%.
Reeves said households would welcome the BoE rate cut.
The BoE’s cautious language on future interest rate cuts was similar to previous months, in line with investor views that it is likely to cut interest rates more slowly than the European Central Bank.
The BoE did not comment on Donald Trump’s election victory in the United States, which has led to a sharp reduction in bets that the Federal Reserve will cut interest rates aggressively.
Following the Bank of England rate cut, financial markets are only forecasting two interest rate cuts in 2025, down from two or three previously and four pre-Budget.
The Bank of England said inflation would likely rise to 2.5% this year, from 1.7% in September, and reach 2.7% by the end of next year, before gradually falling below its target. of 2% at the end of the three-year forecast.
Government decisions to raise the cap on bus fares, increase the value-added tax on private school tuition and increase employers’ social security contributions are likely to drive inflation.
With the latter measure combined with a 6.7% rise in the national minimum wage, the Bank of England said employers were facing rising costs, although it could not be sure of the overall effect on inflation as Employers could respond by laying off staff or accepting lower benefits.
The Bank of England repeated its message that monetary policy would need to remain “tight for long enough” to sustainably return inflation to the 2% target.
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