The Bank of England cut interest rates today – but the big-spending Budget could keep borrowing costs higher in future.
The Monetary Policy Committee 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 held the rate.
However, the Bank indicated that the process 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 suggested that the Bank could be ‘aggressive’ if inflation remained on the right path.
The announcement came after Chancellor Rachel Reeves splurged on the public sector by pumping up borrowing and hiking taxes in her fiscal set-piece last week.
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 under but highlighted that ‘domestic inflationary pressures are resolving more slowly’ and the Budget would add half a percent 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.’
Bank governor Andrew Bailey had suggested that it could be more ‘aggressive’ about rate cuts if CPI continued to subside
The MPC said: ‘The combined effects of the measures announced in Autumn Budget 2024 are provisionally expected to boost the level of GDP by around 3/4 percentage points at their peak in a year’s time, relative to the August projections.
‘The Budget is provisionally expected to boost CPI inflation by just under ½ of a percentage point at the peak, reflecting both the indirect effects of the smaller margin of excess supply and direct impacts from the Budget measures.’
The bombshell victory for Donald Trump in the US elections could also factor in the Bank’s future thinking.
The returning president has vowed to impose tariffs on imports to America, 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.
Threadneedle Street’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.
Rachel Reeves said yesterday she would be appealing to the Trump administration not to go ahead with tariff increases
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.’
