The Bank of England (BoE) lowered interest rates by 25 basis points, amid uncertainties created by Labor’s significant budget announcement regarding future policy adjustments. The Monetary Policy Committee of the BoE voted 8-1 in favor of this decision, bringing the bank’s key rate down to 4.75 percent. This marks the second reduction by the central bank this year, following the initiation of its easing cycle in August.
Inflation trends influence decisions
Policymakers cited a continued decline in inflation as a key factor in their decision, mentioning that additional cuts might be anticipated if price growth remains consistent. However, the bank projected a slight uptick in inflation for 2025, estimating it to reach around 2.75 percent before eventually returning to its 2 percent target.
The Monetary Policy Committee voted by a majority of 8-1 to reduce #BankRate to 4.75%. Find out more in our #MonetaryPolicyReport: https://t.co/lEYCgPolsz pic.twitter.com/bX4TpXQqB6
— Bank of England (@bankofengland) November 7, 2024
Gradual approach to policy restraint
Governor Andrew Bailey indicated that, considering the evolving evidence, a gradual approach to lifting policy constraints was still deemed appropriate. He emphasized that monetary policy must remain restrictive for an adequate period until the risks associated with inflation sustainably returning to the 2 percent target diminish further.
Market expectations and future cuts
Money markets had priced in a 97 percent likelihood of this quarter-point reduction during the November meeting, although analysts cautioned that future cuts might be postponed due to the government’s tax and spending budget. Investors are now keenly awaiting insights from Governor Andrew Bailey and his colleagues regarding their updated economic outlook in light of the recent budget and the U.S. presidential election.
Read more: Bank of England surprises markets with 50 basis point interest rate hike
Economic outlook and growth projections
Goldman Sachs noted that the prospects for stronger growth in 2025 were likely to lessen the urgency for immediate cuts. Although policymakers indicated a gradual approach to rate reductions following their decision to maintain rates in September, economists had raised their expectations for a quicker easing due to a significant decline in inflation to 1.7 percent and a slowdown in wage growth prior to the budget announcement.
Impact of budget announcements
These expectations were tempered after U.K. Finance Minister Rachel Reeves unveiled £40 billion ($51.41 billion) in tax increases and proposed changes to the U.K.’s debt regulations, which the Office for Budget Responsibility (OBR) warned could elevate near-term growth and inflation. Governor Bailey reiterated that policymakers still needed to observe a sustained reduction in services inflation to feel confident about further rate cuts, stressing the need for a broader decrease in services price inflation to maintain overall inflation at the bank’s 2 percent target over time.
Maintaining interest rates in September
In September 2024, the BoE opted to maintain interest rates at 5 percent. This decision was reached by the Monetary Policy Committee (MPC) with an 8-1 vote, where only one member advocated for a reduction to 4.75 percent.
Latest figures showed that U.K.’s inflation remained steady at 2.2 percent for the year ending in August, despite a noticeable rise in flight costs. The BoE anticipated that annual inflation would increase to around 2.5 percent by the end of the year, as the impact of last year’s energy price drops began to fade in year-over-year comparisons.
In August, the BoE had previously cut rates by 25 basis points as annual inflation fell to 2 percent in July.
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