A pedestrian crosses the streets in front of The Bank of England illuminated by a ray of sunlight, in central London, on February 12, 2024.
Henry Nicholls | Afp | Getty Images
LONDON — The Bank of England cut interest rates by 25 basis points Thursday while raising its inflation forecast as Labour’s bumper budget announcement muddies the outlook for future policy easing.
The BOE’s Monetary Policy Committee voted 8-1 in favour of the decision to bring the bank’s key rate to 4.75%. It marks the central bank’s second such trim this year, after it began its easing cycle in August.
Policymakers pointed to a continued easing of inflation as a factor influencing their decision, but noted that the government’s fiscal plan had led to a raise in their forecasts for growth and inflation.
The bank now sees inflation rising by 0.5 percentage points, more than previously forecast, to hit a high of around 2.75% next year before falling back to its 2% target. Growth, meanwhile, is seen increasing by around 0.75% in a year’s time.
BOE Governor Andrew Bailey said the bank would, as such, need to retain a “gradual approach” to policy easing.
“Monetary policy will need to remain restrictive for sufficiently long until the risks to inflation returning sustainably to the 2% target over the medium term have dissipated further,” he said, speaking at a press conference shortly after the rate decision.
Money markets had been pricing in a 97% chance of the quarter-point trim at the November meeting, even as analysts warned that subsequent cuts could be delayed as a result of the government’s tax-and-spend budget.
“Even though interest rates have further to fall, the upward pressure on inflation from the budget and growing global risks, including possible new US tariffs, could mean that policy is loosened more modestly than many anticipated,” Suren Thiru, economics director at ICAEW, said in a note following the announcement.
Policymakers signaled a “gradual approach” to cuts after holding rates steady at their September meeting. However, economists had upped their expectations of a faster pace of easing following a sharp fall in inflation to 1.7% and a drop off in wage growth prior to the budget.
Those expectations were later dampened after U.K. Finance Minister Rachel Reeves announced £40 billion ($51.41 billion) in tax hikes and a change to the U.K.’s debt rules, which the Office for Budget Responsibility (OBR) warned could push up near-term growth and inflation.
