The Bank of England’s latest decision to cut interest rates may mark the last reduction for a while, as new forecasts suggest inflation could climb following recent Budget measures. The Bank cut its interest rate from 5% to 4.75%, a widely anticipated move, but it signaled caution over future cuts due to expected inflationary pressures from the Budget’s spending increases.
Governor Andrew Bailey indicated that while rates are set to decline gradually, any additional cuts would be approached conservatively. “We must be careful not to reduce rates too quickly or by too much,” Bailey said, hinting that the Bank is likely to keep rates steady during its December meeting. Investors, in turn, now anticipate no further reductions this year.
Despite falling below the Bank’s 2% target in September, inflation is expected to tick up in the near term, partly driven by higher gas and electricity prices last month. The Bank previously forecast inflation would stabilize at 2% by 2026, but this target has now been pushed back to 2027.
The Monetary Policy Committee (MPC) voted 8-1 in favor of the recent rate cut, with member Catherine Mann dissenting. Mann argued that the Budget’s provisions, such as VAT on private school fees and a national bus fare cap, are likely to spur higher inflation and suggested caution in lowering rates further.
Sarah Coles, head of personal finance at Hargreaves Lansdown, noted that the new Budget introduces additional borrowing, a higher national living wage, and employer National Insurance contribution increases, all of which could drive inflation. “The Bank of England has delivered one more cut, but we don’t expect any further reductions soon. With these budgetary changes, the Bank remains wary of pushing rates down too much,” Coles said.
The slower pace of rate reductions means mixed news for consumers. Savers could see slightly higher returns, but mortgage borrowers may face continued challenges, as average mortgage rates remain high. Moneyfacts, a financial data company, reported that the current average two-year fixed mortgage rate is 5.4%, while a five-year fixed rate is 5.11%.
Over a million mortgage borrowers on tracker or variable-rate deals will see a decrease in their payments due to the recent cut. However, mortgage rates are still high compared to much of the past decade, putting added pressure on household budgets.
The rate cut also impacts savers, as returns on accounts may drop. Current easy-access accounts are averaging around 3% interest annually, and some consumers are concerned about declining returns. Claire Hopwood and Gavin Laking, who are saving for a house purchase, said recent cuts have already affected their savings. “We enjoyed a 4.5% rate, but now it’s dropped to 3.9%,” Laking noted.
Last week’s Budget included £28 billion in additional annual borrowing and £40 billion in tax-raising measures, with the largest being a rise in employer National Insurance contributions. Economists say that companies might pass these costs on to consumers, potentially slowing wage growth.
The Bank also adjusted its growth forecast for 2025 and projected that unemployment could fall from 4.7% to 4.1%, reflecting a cautiously optimistic outlook on the economic impact of the Budget’s increased spending. Chancellor Rachel Reeves welcomed the rate cut, acknowledging it as a relief for families but stressing the significant challenges many still face following previous fiscal policies.
