Bank of England cuts interest rate by 0.25 points to 4.75% | Interest rates

Mortgage borrowers have been warned that the rate cut will take longer after the Bank of England warned that Rachel Reeves' Budget would increase inflation while boosting economic growth.

When the central bank announced a quarter-point cut in interest rates to 4.75% on Thursday, it condemned last week's budget and said the chancellor's plans would push inflation to a new high next year.

The bank's Monetary Policy Committee (MPC) voted by a majority of eight to one to cut interest rates for the second time this year to ease pressure on households and businesses due to high borrowing costs.

But it said Reeves' £70 billion of additional spending, supported by higher taxes and borrowing, would raise headline inflation by about 0.5 percentage points and gross domestic product (GDP) by 0.75 percent by the middle of next year .

The bank updated its forecasts to take budgetary measures into account, saying it now expects inflation to peak at 2.75% by the middle of next year and then remain above the 2% target in 2026 until 2027 – a year from now longer – falling back again had expected in its previous forecasts published in August.

The pound rose against the US dollar following the bank's decision to cut interest rates, while financial markets responded by betting that Threadneedle Street would cut rates less frequently and more slowly next year.

“While the Bank of England cut interest rates from 5% to 4.75% today, it indicated that the Budget means interest rates will continue to fall only gradually,” said Paul Dales, chief UK economist at Capital Economics. He said interest rates are now on track to fall to about 3.5%, rather than 3%, by early 2026.

Threadneedle Street said it expects the government's increase in National Insurance Contributions (NICs) and the “national living wage” could add to inflationary pressures as businesses pass on the costs in the form of smaller pay rises and higher prices in stores.

Other measures, including raising the cap on bus fares and the sales tax for private schools, could also drive up prices. The development prompted one member of the MPC, external economist Catherine Mann, to push for interest rates to be kept at 5%.

Sarah Coles, head of personal finance at investment platform Hargreaves Lansdown, said the slower pace of interest rate cuts would have an impact on struggling households.

“The fact that so few cuts are expected in 2025 will be a blow to anyone who had hoped their mortgage would be less burdensome in the coming months,” she said.

Bank of England Governor Andrew Bailey suggested that borrowing costs were likely to continue falling in the future, but warned against expecting quick action.

“We need to ensure that inflation remains close to target so that we cannot cut interest rates too quickly or too much. But if the economy performs as we expect, it is likely that interest rates will continue to gradually decline from here,” he said.

Inflation fell back to 1.7% in September – after peaking at 11.1% in October 2022 – but was already on track to rise above after an increase in the Ofgem UK household energy price cap in October 2% return.

Reeves said the rate cut was “welcome news” for millions of families, but households still faced challenges following Liz Truss' mini-Budget.

She said: “Today’s rate cut will be welcome news for millions of families, but I am under no illusion about the scale of the challenge facing households following the previous Government’s mini-Budget.

“This Government's first Budget sets out how we will make the long-term decisions to lay the foundations for change by investing in the NHS and rebuilding Britain, while ensuring working people do not face higher taxes on their payrolls .”

Amid expectations that Donald Trump's US election victory would also pave the way for renewed inflationary pressures in the global economy, Bailey said a “gradual” approach to reducing borrowing costs was needed.

He suggested the bank would “wait and see” whether Trump would impose sweeping import tariffs on America's trading partners – as the president-elect had threatened on the campaign trail – and said it was too early to “pre-judge what might happen.” .

But he warned that Britain was an open economy, subject to disruptions in global trade. “We need to watch very closely the fragmentation of the global economy… There are a lot of risks associated with that,” he said.

“There is more uncertainty out there. First, there is undoubtedly greater global uncertainty. Secondly, there are of course domestic political uncertainties. We obviously have to see how the budget measures work out in terms of their economic impact.”