The Bank of England cut rates by 25 basis points to 4.75%, the second cut this year, as inflationary pressures begin to ease and economic data point to a slowdown in wage growth.
The nine-member Monetary Policy Committee (MPC) voted in favor of the cut, following a steady trend in economic forecasts pointing to a possible easing of inflationary pressures.
The rate cut comes despite new fiscal policies introduced in Chancellor Rachel Reeves’ recent budget, which are expected to increase costs for UK businesses, including a 1.2% increase in employers’ national insurance contributions from April. Stuart Douglas, Director of Capital Markets at Centrus, commented: “While the rate cut was expected, concerns remain about inflationary pressures arising from both changes in fiscal policy and the impact of Donald Trump’s US election victory on global trade. ”
Trump’s proposed tariffs on imports have fueled fears of a trade war that could lead to higher costs for British businesses and consumers, impacting both inflation and growth. Economists at the National Institute of Economic and Social Research warned that these factors could prompt the Bank of England to ease policy more cautiously.
At the Bank’s last meeting in September, MPC members took a cautious stance and left interest rates unchanged. Some members, including chief economist Huw Pill, expressed concerns about high services inflation and wage growth. With regular wage growth reaching its weakest level in two years, now down to 4.9%, and headline inflation falling from 2.2% in August to 1.7% in September, the Bank’s decision to interest rates reduce the changing economic conditions.
Catherine Mann, an external MPC member known for favoring restrictive monetary policy, maintained her caution, arguing that tight policies remain necessary to curb inflationary behavior. However, Bank of England Governor Andrew Bailey raised the possibility of a “more aggressive” easing cycle, balancing the need for caution with the benefits of rate cuts in a slowing economy.
The market data reflected some of the fiscal pressure, as UK government bond yields rose by 25 basis points following the budget announcement – a significant increase if we exclude the aftermath of the 2022 mini-budget. Meanwhile, analysts at Nomura noted that falling inflation and slower wage growth are giving the Bank more room for rate cuts, with further cuts forecast in the coming year.
Goldman Sachs predicts that UK interest rates could fall to 3% by September 2025, although uncertainties remain. The interest rate cut was received with cautious optimism among British companies. Mike Randall, CEO of Simply Asset Finance, noted that while the cut provides some relief, further support is essential to meet the growth targets set out in the Chancellor’s autumn statement.
“SMEs need more certainty and more incentives to invest in long-term growth,” said Randall. “This will help achieve the government’s aim of rebuilding Britain.”
The latest cut is designed to support a UK economy facing the complex pressures of both domestic fiscal policy and international trade uncertainties, paving the way for further potential adjustments as the Bank keeps an eye on the evolving economic landscape.