The Bank of England’s nine-member Monetary Policy Committee (MPC) has voted to reduce interest rates, citing a steady trend in economic forecasts that suggest a potential easing of inflationary pressures. The decision comes despite the introduction of new fiscal policies in Chancellor Rachel Reeves’s recent budget, which are expected to increase costs for UK businesses, including a 1.2% rise in employers’ National Insurance contributions starting in April.
Stuart Douglas, Director of Capital Markets at Centrus, acknowledged that the interest rate cut was anticipated but raised concerns about inflationary pressures. He pointed to potential risks from fiscal policy changes and the impact of Donald Trump’s proposed tariffs, which could disrupt global trade and increase costs for UK businesses and consumers. This has raised fears of a trade war that might dampen growth and further strain inflation.
Economists from the National Institute of Economic and Social Research (NIESR) warned that these factors could lead the Bank of England to take a more cautious approach in future policy adjustments. At the MPC’s previous meeting in September, some members, including Chief Economist Huw Pill, expressed concerns over persistent inflation in services and rising wage growth, prompting the Bank to hold rates steady.
Recent economic data reflects shifting conditions. Regular wage growth has slowed to its weakest in two years, down to 4.9%, while headline inflation dropped from 2.2% in August to 1.7% in September. These developments have paved the way for the Bank’s rate cut, signaling a shift in monetary policy.
Catherine Mann, an external MPC member known for her preference for restrictive monetary policy, remained cautious, emphasizing the importance of tight policy to prevent inflation from re-emerging. However, Bank of England Governor Andrew Bailey indicated that a “more aggressive” loosening cycle could be considered, as the Bank balances the need for caution with the benefits of rate cuts in a slowing economy.
Market data following the budget announcement showed some immediate impacts, with yields on UK government bonds rising by 25 basis points—a significant jump, excluding the aftermath of the 2022 mini-budget. Analysts at Nomura noted that easing inflation and slower wage growth provide the Bank with more flexibility to lower rates further, with some projecting additional cuts in the coming months.
Goldman Sachs forecasts UK interest rates could dip to 3% by September 2025, although uncertainty remains. UK businesses have expressed cautious optimism following the rate cut. Mike Randall, CEO of Simply Asset Finance, welcomed the reduction but called for additional support to help small and medium-sized enterprises (SMEs) meet growth targets. He stressed the need for greater certainty and incentives to invest in long-term growth.
The latest rate cut is seen as a response to the complex pressures facing the UK economy, with fiscal policies and international trade uncertainties playing a significant role. The Bank of England will continue to monitor these factors closely as it assesses future policy decisions.
