Boost for Brits as Bank of England trims interest rates from 5% to 4.75%… but falls now set to be ‘gradual’ after Labour’s big-spending Budget_Nhy
The Bank of England cut interest rates today – but Chancellor Rachel Reeves‘ big-spending Budget could keep borrowing costs higher in future.
The Monetary Policy Committee (MPC) decided to reduce the base rate from 5 per cent to 4.75 per cent at its latest meeting.
Eight MPC members voted for the cut, with one preferring to hold the rate.
But the Bank indicated that the process of reducing interest rates would be ‘gradual’ from here, hinting another cut before Christmas is unlikely.
There had been optimism about the prospect of swift falls after Governor Andrew Bailey previously suggested the Bank could be ‘aggressive’ if inflation remained on the right path.
But, speaking at a press conference this afternoon, Mr Bailey admitted there was both ‘greater global uncertainty’ and ‘domestic uncertainties’.
He was quizzed about the potential impact of Donald Trump‘s return as US president and last week’s Budget.
‘We need to obviously see how the Budget measures pass through in terms of their economic effects,’ Mr Bailey said.
Asked about the possibility of Mr Trump sparking a global trade war when he returns to the White House in January, the Governor added: ‘We will have to watch this very closely.’
He also stressed the importance of watching out for the ‘fragmentation of the world economy’.
But Mr Bailey warned it was ‘not useful or wise to enter into speculation’ about what economic policies Mr Trump might pursue, including proposed higher tariffs on US imports.
Speaking at a press conference this afternoon, Bank of England Governor Andrew Bailey admitted there was both ‘greater global uncertainty’ and ‘domestic uncertainties’
Today’s announcement of the MPC decision came after Chancellor Rachel Reeves splurged on the public sector in her first Budget by pumping up borrowing and hiking taxes
Asked about the possibility of Donald Trump sparking a global trade war when he returns to the White House in January, Mr Bailey said: ‘We will have to watch this very closely.’
Today’s announcement of the MPC decision came after Ms Reeves splurged on the public sector in her first Budget by pumping up borrowing and hiking taxes.
The huge package has spooked gilts markets, increasing borrowing costs for the Government.
And the OBR watchdog responded by predicting that both inflation and interest rates will stay elevated for longer.
The MPC minutes pointed to ‘continued progress’ in getting CPI inflation under control.
But they highlighted ‘domestic inflationary pressures are resolving more slowly’ and the Budget would add just under half a percentage point to price increases.
‘We need to make sure inflation stays close to target, so we can’t cut interest rates too quickly or by too much,’ Mr Bailey said.
‘But if the economy evolves as we expect, it’s likely that interest rates will continue to fall gradually from here.’
The pound strengthened after the news, as markets priced in the higher inflation and interest rate path.
Asked about Mr Trump’s mooted policy of raising import tariffs, Mr Bailey said: ‘Let’s wait and see where things get to.
‘I’m not going to prejudge what might happen, what might not happen, where policy goes to.’
He added: ‘I do think we have to watch very carefully the fragmentation of the world economy. I will say that.’
When asked whether he agreed with Mr Trump that ‘tariff’ is the most beautiful word in the dictionary, Mr Bailey said: ‘There are many words in the dictionary.
‘I don’t have a favourite word or a most beautiful word in the dictionary. I’m not sure I’m going to join in that debate.’
The MPC said inflation has stayed close to the target of 2% since May after falling from a peak of just over 11% in 2022
The MPC said it expected inflation to rise slightly again over the next year, to around 2.75%, before falling back to the 2% target after that
The Chancellor said yesterday she would be appealing to the Trump administration not to go ahead with tariff increases
Ms Reeves said the interest rate cut would be ‘welcome news’ for millions of families, but added that households are still facing a challenge after Liz Truss’ mini-budget.
‘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,’ the Chancellor said.
‘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.’
Shadow chancellor Mel Stride warned Labour to ‘not undo the hard work’ the Tories did on bringing down inflation from the peak of the cost-of-living crisis.
He said today’s cut would be ‘welcomed by millions of homeowners and builds on the work the Conservatives did in office to hold inflation down’.
‘However, the independent OBR and the Bank of England set out that as a result of Labour’s choices in the Budget last week inflation will be higher,’ he added.
‘The Government must not undo the hard work the last government did.’
Mr Trump has vowed to impose tariffs on imports to America when he returns to the White House, sparking fears of a blow to global growth.
With experts already trimming forecasts for UK plc, Ms Reeves said yesterday she would be appealing to the Trump administration not to go ahead with tariff increases.
The Chancellor told MPs said she would make ‘strong representations’ to the president-elect about the damage a protectionist regime would inflict.
The Bank of England’s next moves could be swayed by grim figures this week showing growth in the UK services sector slowing to its lowest rate in nearly a year.
The closely-watched S&P Global UK services PMI survey scored 52.0 in October, slowing from 52.4 in September.
It was slightly below the 51.8 reading forecast by a consensus of economists.
Any reading above 50 means a sector is in growth, while a score below this means it is shrinking.
Tim Moore, economics director at S&P Global Market Intelligence, said: ‘October data signalled another slowdown in output growth across the service sector as heightened business uncertainty and concerns about the general UK economic outlook had an adverse impact on demand conditions.
‘The latest expansion of service sector activity was the weakest since November 2023, while new business growth slipped to a four-month low.
‘The wait for clarity on Government policy ahead of the autumn Budget was widely reported to have weighed on business confidence and spending.’
Input cost inflation, mainly driven by higher wages, rose to a three-month high, businesses reported, but remained softer than in the first half of the year.
Price inflation edged up, but stayed close to its 43-month low recorded in September.
Services sector inflation has been a closely watched metric for policymakers at the Bank of England, who meet this week.
Policymakers are expected to cut the base interest rate by a quarter point, following a dip in the headline rate of inflation.
Mr Moore continued: ‘Broader geopolitical concerns and forthcoming US elections also added to a sense of wait-and-see on business investment decisions in October.
‘At the same time, cost-of-living pressures remained a constraint on household spending.
‘With service providers grappling with softer new order growth and less upbeat business activity expectations for the year ahead, the latest survey pointed to a decline in staffing numbers for the first time since December 2023.
‘A number of firms also noted budget constraints due to elevated salary pressures.
‘Higher wages resulted in another month of strong input cost inflation across the service economy.’
