Bank of England announces rate cut amidst Budget implications

The Bank of England has reduced interest rates by 25 basis points, indicating a "gradual" approach as the Budget's impact permeates the economy.

Eight members of the Bank's Monetary Policy Committee (MPC) voted in favour of the second rate cut this year, with only Catherine Mann opposing.

This brings the benchmark Bank Rate to 4.75 per cent, down from a high of 5.25 per cent. The Bank made its first interest rate cut since the pandemic in August.

Market expectations were met with this decision due to recent progress on inflation. Data released last month revealed that the headline rate dropped to 1.7 per cent in September, the lowest since April 2021.

Underlying inflation indicators, such as services inflation and wage growth, have also continued to ease, suggesting a decrease in domestic price pressures, as reported by City AM.

"If the economy evolves as we expect it's likely that interest rates will continue to fall gradually from here," stated Andrew Bailey, Governor of the Bank.

However, Bailey emphasised that the Bank "can't cut interest rates too quickly or by too much" due to ongoing worries about inflationary dynamics.

Specifically, the Bank highlighted the potential inflationary effects of the new government's inaugural Budget.

Chancellor Rachel Reeves unveiled approximately £40bn in tax hikes last week, which are set to underpin a £70bn average annual increase in government spending. According to the Bank's latest projections, this blend of tax increases and heightened expenditure is expected to elevate inflation while simultaneously stimulating growth.