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, with eight members of the nine-strong monetary policy committee voting for a cut. Making its decision, the central bank noted continued progress in slowing inflation, with headline CPI dropping below target in September to 1.7%.
“Monetary policy has been guided by the need to squeeze remaining inflationary pressures out of the economy to achieve the 2% target both in a timely manner and on a lasting basis,” it said.
This latest move shows the Bank’s continued “slow and steady approach”, says Morningstar’s European market strategist Michael Field.
Still, the recent Oct. 30 Budget has made the rate-cutting trajectory more uncertain heading into 2025 because the Bank of England now forecasts that new fiscal measures will add 0.50 percentage points to CPI and GDP by 0.75 percentage points. Even before the Budget measures, inflation was expected to rise again into 2025, after dropping below the 2% target in recent months.
Fixed-income markets are now pricing in heightened UK government spending as inflationary, forcing the Bank of England to slow the expected path of rate cuts. Gilt yields across the curve have risen sharply since last week on the taxation, spending and debt plans of the new government.
November’s cut 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 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.
In the accompanying statement, the Bank repeated the mantra that rates cuts will be gradual and that “monetary policy will need to continue to remain restrictive for sufficiently long until the risks to inflation returning sustainably to the 2% target in the medium term have dissipated further.”
Where Next for UK Interest Rates? Expert Views
Before today’s announcement on rates, financial markets had put a 97% probability on a rate cut and a 32% chance of a cut in December, the last meeting of 2024. Markets, as indicated by overnight index swaps, put the February meeting as the next likely time for a cut, assigning a 73% probability.
“The market is pricing in another 0.75% cut over the next 12 months, something that seems eminently achievable, all things being equal,” Field says.
The timeline for future cuts has changed significantly over the past fortnight, says James McManus, chief investment officer at Nutmeg, which is owned by J.P. Morgan. “We expect the bank will remain data dependent, but recent events will likely make policymakers think twice about the cadence of the rate cutting cycle.”
Will UK Inflation Now Rise Again?
The Bank of England meeting this week involved 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.
Since that meeting, 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 forecasts for 1.5% just eight months ago. Inflation forecasts remain 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.
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