BoE lowers interest rates to 4.75%, sees gradual cuts ahead

The Bank of England (BoE) reduced its benchmark interest rate by 25 basis points on Thursday, citing "continued progress" in controlling inflation.

BoE lowers interest rates to 4.75%, sees gradual cuts ahead

The Monetary Policy Committee (MPC) voted 8-1 in favor of the rate cut, lowering it to 4.75%. This move, anticipated by many, follows the BoE's first rate cut in four years in August, after which rates remained unchanged in September. Catherine Mann was the sole dissenter, voting to keep the rate at 5.0%. Looking ahead, the BoE indicated it would take a "gradual" approach to easing policy, highlighting "significant uncertainty" in the labor market and the various potential inflationary trajectories. "We need to keep inflation low," the BoE stated. "Thus, we will not reduce interest rates too quickly or too steeply. If conditions unfold as expected, interest rates are likely to decline gradually." This decision follows the recent budget release and the election of Donald Trump as U.S. president, both of which are expected to add upward pressure on inflation.

Budget effect

The BoE anticipates that the budget will raise GDP levels by around 75 basis points at their peak within a year, relative to previous forecasts in August. The inflation impact of the budget is estimated at just under 50 basis points. "The inflationary impact of the budget will depend on how rapidly and extensively higher costs translate into prices, profit margins, wages, and employment," the BoE noted. The Office for Budget Responsibility (OBR), following the budget, projects inflation at 2.5% in 2024, rising to 2.6% in 2025, then moderating to 2.3% in 2026 and 2.1% in 2027. Economic growth is forecast to increase to 2.0% in 2025 from 1.1% in 2024, with growth at 1.8% in 2026, before tapering to 1.5% in 2027 and 2028. Last week's fiscal policy announcements—comprising tax hikes, increased spending, and higher borrowing—prompted short-lived volatility in financial markets, with UK bond yields surging and the pound weakening. Following today's rate decision, the pound traded at $1.2928, slightly higher than $1.2907 before the announcement. The yield on the 10-year UK bond was 4.61%, compared to 4.57% earlier. Meanwhile, the FTSE 100 index fell by 11 points, reversing a 2-point gain seen around midday.