"CPI could tick up in the coming months, potentially resulting in a slower pace of base rate cuts than previously predicted."
- Tim Parkes, CEO of RAW Capital Partners
The Bank of England's Monetary Policy Committee has voted 8–1 to reduce Bank Rate from 5% to 4.75%. One member preferred to maintain Bank Rate at 5%.
The MPC last reduced interest rates from 5.25% to 5% in August, the first cut since March 2020.
Industry experts are now split on whether a further rate cut will come in December, as previously predicted before last month's Budget.
CPI inflation fell to 1.7% in September but is expected to increase to around 2.5% by the end of the year as weakness in energy prices falls out of the annual comparison. In addition, the Budget is provisionally expected to boost CPI inflation by just under half a percentage point at the peak.
Rob Morgan, chief investment analyst at Charles Stanley, says we can expect a more elevated trajectory of UK interest rates following the Budget. He commented: "Governor Andrew Bailey’s recent comments that the Bank of England could be “a bit more aggressive” with cuts if inflation data remains favourable are now ringing a little hollow. Even before the Budget it was possibly wishful thinking. Services inflation remains worrisome at 4.9% and wage inflation is running at a similar clip. And now the unveiled fiscal policies look decidedly inflationary, as reflected by OBR forecasts that pencil in above-target price rises for both 2025 and 2026.
"By lumping additional costs onto employers in the form of extra national insurance costs on top of minimum wage rises, the Chancellor is reinforcing the trend of escalating costs in the worker-heavy services sector, which plays a huge role in the economy. Wage rises and national insurance costs will result in either lower corporate margins or in price increases to the consumer, and we anticipate more of the latter than the former.
"There is now significantly more uncertainty around inflation and interest rates going forward, and overall market expectations have shifted higher. There is also likely to be a wider range of views held by the various members of the MPC. Some may feel the inflationary impacts of additional public spending and extra costs foisted onto businesses are at odds with a further cut for the time being. This will not be enough to delay a rate cut but makes a split in the voting likely at today’s meeting.
"It will therefore be particularly interesting to inspect the commentary around the decision making and the BoE’s own interpretation of what Budget policies mean. Justifiably, it may state that there are a range of impacts that are yet to be determined and that it will take time to adequately assess these. However, if it does fall into line with what other forecasters are suggesting then interest rate cuts are going to be shallower, slower and fewer than it previously supposed."
However, others remained more upbeat, noting that the Budget hasn't impacted the Bank's path and suggesting more rate cuts could follow in the months ahead.
Tim Parkes, CEO of RAW Capital Partners, said: “The main threat to an interest rate cut today was the fallout from the Autumn Budget. The Bank was evidently reassured enough by the reaction of the markets, although the Chancellor’s growth-focussed policies did result in an uptick in the OBR’s inflation outlook, which could have heightened tensions ahead of today’s vote on the base rate.
“Evidently the Monetary Policy Committee does not view Reeves’ stimulus as substantial enough to justify delaying cuts, suggesting that we are in a transitionary phase where a more accommodative monetary stance is increasingly favoured on Threadneedle Street. Decelerating wage growth likely supports this view, though it’s important to note that the Budget may slow the pace of future cuts. Indeed, with services inflation still a persistent issue and consumer spending expected to rise over the festive season, the CPI could tick up in the coming months, potentially resulting in a slower pace of base rate cuts than previously predicted.
“That said, the bigger picture is encouraging. Any rate reduction is positive news for the lending and property markets. Although rates may never return to the historic lows seen between 2008 and 2021, they are trending in a favourable direction, making it easier for homeowners and investors to manage both current and future loans. Looking ahead to 2025, we expect specialist finance demand to grow, provided that brokers and lenders can support borrowers with the financial products and expertise they will need to navigate the changing political and economic landscapes with confidence.”
Paul Noble, CEO of Chetwood Bank, commented: “This decision is significant. Today's cut is a signal of intent and confidence from the Bank of England. Buoyed by positive inflation news, even a degree of market volatility after last week's Budget and the reaction to the US election results has failed to deter the central bank from its path, suggesting more rate cuts could follow in the months ahead as it attempts to spark greater growth and investment across the UK economy."
