Bank of England Cuts Rates To 4.75%

Today, the Bank of England announced a cut in the base interest rate from 5% to 4.75%, marking the second reduction this year.

While this move is intended to provide relief to borrowers and stimulate economic activity, it comes with a caveat: the recent budget unveiled by Chancellor Rachel Reeves is expected to slow down the pace of future rate cuts.

The Interest Rate Cut

 

The Bank of England's Monetary Policy Committee (MPC) voted 8-1 in favor of reducing the base rate by 0.25 percentage pointsThis decision was driven by a significant drop in inflation, which fell to 1.7% in September, its lowest level since April 2021.

The cut aims to ease borrowing costs for households and businesses, providing much-needed relief after a period of elevated interest rates.

Impact of Rachel Reeves' Budget

However, the budget announced by Rachel Reeves last week has introduced several measures that could counteract the benefits of the rate cut. The budget includes substantial tax increases and higher public spending, which are expected to boost economic growth by 0.75 percentage points at its peak next year.

While this might sound positive, it also means increased inflationary pressures.

The Office for Budget Responsibility (OBR) has projected that the budget will push up the Consumer Prices Index (CPI) inflation by just under 0.5 percentage points in late 2026This means that inflation will now reach the Bank's 2% target in the second quarter of 2027, a year later than previously projected.

As a result, the Bank of England will need to be cautious in cutting rates further to ensure that inflation remains under control.

Higher Borrowing Costs and National Debt

The increased borrowing costs due to higher gilt yields will also impact the government's finances. As gilt yields rise, the cost for the government to borrow money increases, leading to higher interest payments on national debt

This means that more of the government's budget will be spent on servicing debt, leaving less money available for public services and investments.

Conclusion

While today's interest rate cut by the Bank of England is a welcome relief for borrowers, the recent budget by Rachel Reeves introduces complexities that could slow down the pace of future rate cuts. The increased inflationary pressures and higher borrowing costs will require careful management to ensure that the economy remains stable and sustainable.

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