The Bank of England has cut the base rate by 0.25% to 4.75% in a move widely anticipated in the finance sector. However, the Bank has forecast that last month’s Budget will increase inflation will increase by up to half a percentage point over the next two years, which will slow the decline of interest rates.
It is the second rate cut in three months, with the last reduction moving from 5.25% to 5%. The Bank of England had made 14 consecutive rate increases prior to that.
Other European central banks have announced similar, with the SNB, ECB and Sweden’s Riksbank all reducing rates on multiple occasions this year.
The Bank's Monetary Policy Committee (MPC) stated that inflation will return "sustainably" to its target of 2% in the first half of 2027, a year later than previously thought.
The head of the central bank, Andrew Bailey, said: “Disinflation is happening, I think faster than we expected it to, but we still have genuine question marks about whether there have been some structural changes in the economy.”
The boost to the economy has left markets betting that the MPC will pause after November and not follow through with a second base rate cut in December, to ensure it does not stoke the economy.”
EY ITEM Club chief economic advisor Matt Swannell said last week: “The Monetary Policy Committee has much to consider when thinking about where interest rates will head beyond November.
“On the one hand, inflation has been lower than it anticipated, and with a fall in oil prices, the Bank of England’s updated inflation forecast will be lower over the next year or so. On the other hand, the Budget has loosened the purse strings and will likely lead to an uplift in the Bank of England’s 2025 growth forecast.”
Paul Jenkins, Senior Partner, at McKinsey & Company: “The Bank of England’s rate cut to 4.75% offers some relief for businesses as they brace for a heavier tax burden from the Autumn Budget. With hiring costs rising and margins under pressure, businesses will be looking for ways to drive growth. This rate reduction (although marginal) could ignite a heightened commitment to ‘building’ new capabilities.
“CEOs often face a critical choice: whether to buy or build new capabilities. While M&A remains a viable route, our research highlights a compelling inclination toward venture building. A growth driver that has remained resilient across a range of interest rates—from pre-COVID lows near 2% to the recent highs of around 5%.
“The CEOs that deprioritised new venture building as interest rates rose post-Covid, cited capital constraints as their reason, suggesting that this lowering of interest rates could spark more corporate innovation. And, it has proven to pay off. Organisations that allocate 20% of their growth capital to new ventures achieve two percentage points higher revenue growth than those that don’t invest anything.”