Bank of England Cuts Interest Rates, but Signals Stickier Inflation

The central bank said that future cuts would be gradual amid higher inflation forecasts after the new government introduced spending and tax increases in its budget.

The Bank of England cut interest rates as expected on Thursday, but policymakers said that it would take longer for inflation in Britain to return to the bank’s 2 percent target after the new government’s budget increased spending and taxes.

The central bank lowered interest rates by a quarter point, to 4.75 percent, but emphasized that future rate cuts were likely to be very gradual as inflation pressures still persisted and recent tax and spending plans by the government — now led by the Labour Party — were likely to add to price pressures. The rate cut on Thursday was the second since August, before which rates had been held at a 16-year high for about a year.

“We need to make sure inflation stays close to target, so we can’t cut interest rates too quickly or by too much,” Andrew Bailey, the governor of the central bank, said in a statement.

But, he added, if the economy evolved as policymakers expected, then rates “will continue to fall gradually from here.” One member of the nine-person rate-setting committee had voted to hold rates at 5 percent.

Policymakers have taken a cautious approach to cutting interest rates, even as inflation dropped to 1.7 percent in September, notably below the central bank’s 2 percent target.

There are expectations that inflation will climb back above target in the next few months as gas and electricity prices increase. Several central bank officials have highlighted the risk that inflationary pressures have not been completely stamped out, making it hard to control inflation in the long run.

The Bank of England’s decision on Thursday came as investors and governments around the world prepared for the potential implications of the second presidency of Donald J. Trump. Although there is uncertainty about what policies Mr. Trump will enact, he has proposed higher import tariffs that is likely to rock the global economy.

Globally, central bankers will be alert to the effects of higher yields on government bonds, which have jumped since the election result and tightened financing conditions, and the prospects of stronger inflation imported by their currencies weakening against the dollar.

“It’s important that we see what the policies the new Trump administration decides to announce are,” Mr. Bailey said in a news conference on Thursday. Policymakers will have to “wait and see,” he said, but Britain is an open economy and is affected by international markets.

“We do have a lot of interest in what goes on internationally, and particularly in the U.S., so we’ll be watching it very carefully,” he said.

Adding to concerns that inflation will be sticky next year, the British government announced plans last week to substantially increase spending on public services and investment by about 70 billion pounds, or $91 billion, annually over the next five years. About half will be funded by higher taxes, particularly on employers, and the government will also borrow more.

The Bank of England forecast inflation would return to the 2 percent target in early 2027, about a year later than its previous forecast published three months ago. Inflation would peak around 2.8 percent in just under a year, it forecast. The budget measures would add about half a percentage point to the overall inflation rate at their peak effect in about two years’ time, the bank also said, as the impact of higher taxes, more government spending and changes to fuel taxes fed through to the economy.

The Office for Budget Responsibility, an independent fiscal watchdog, called it “one of the largest fiscal loosenings of any fiscal event in recent decades” that is likely to keep inflation higher over the next two years and lead to fewer rate cuts than anticipated.

The Labour Party’s budget avoided setting off a repeat of the economic tumult that followed the 2022 tax and spending plan by former Prime Minister Liz Truss. The budget received the implicit blessing of the International Monetary Fund, but it has noticeably rippled through financial markets.

Investors sold British government bonds, pushing borrowing costs higher, as £19 billion in extra bond issuance was announced for this year and traders reassessed the path of interest rates. Last week, the yield on 10-year bonds rose by more than 0.2 percentage points, the biggest weekly increase since the start of January.

Policymakers at the Bank of England said that the budget’s impact on inflation would depend on how much and how quickly higher costs, such as those incurred by higher taxes on employers, were passed on as higher prices for consumers, absorbed into profits, or hit wage growth and employment levels.

In the short term, the budget would increase economic growth as more government spending and investment offset the effect of higher taxes, but then that growth effect would fade away, the bank forecast.