Bank of England expected to cut interest rates, but further reductions are uncertain

The Bank of England is anticipated to reduce the base rate this week, providing a lift to borrowers. However, expectations for a second cut before Christmas are dwindling.

The Budget's tax increases are predicted to contribute to higher inflation in the forthcoming months and years, leading to forecasts that the Bank will need to maintain interest rates higher than previously expected. The Bank’s nine-member Monetary Policy Committee (MPC), responsible for setting interest rates, is projected to lower the base rate by a quarter of a percentage point to 4.75 percent on Thursday.

The MPC will also release its latest inflation and growth forecasts, offering the first insight into whether the Bank believes Labour’s tax and spending plans could increase short-term inflation and stimulate growth. Investors have scaled back their expectations for two rate cuts before year-end after Rachel Reeves announced a £70 billion per annum spending plan, implemented through £40 billion in tax increases and £30 billion in additional borrowing.

Matt Swannell, chief economic adviser to the EY Item Club, a forecaster, stated that the budget announcement would not "derail a cut in bank rate at November’s MPC meeting".

He added: "At its September meeting, the Bank of England’s guidance set the stage for another reduction in Bank Rate. Since then, key barometers of inflation’s stickiness — services inflation and pay growth — have continued to fall back more quickly than the MPC had previously forecast. On balance, these positive developments should give most of the MPC the confidence to dial back Bank Rate a little further."

The government’s fiscal watchdog, the Office for Budget Responsibility, warned that Labour's policies would likely push average inflation up by 0.6 percentage points compared to previous forecasts for the next year. It also noted that it wouldn't be until 2029 that inflation would sustainably come down to the Bank's target of 2 percent. Moreover, they anticipate that the Bank of England base rate would decrease from its current figure of 5 percent to 3.5 percent by the end of the decade, showing an increase of around 0.5 percentage points from its March prediction and 0.25 percentage points up since the Budget.

Predictions also show that the average mortgage rate would climb from its present rate of 3.7 percent in 2024 to about 4.5 percent by 2027. Notably, as of Thursday, the average rate on a five-year fixed mortgage stood at 5.09 percent, while a two-year fix was reported at 5.39 percent. Ales Koutny of Vanguard, the second largest asset manager globally, voiced his views that the Bank of England might hold off on cutting rates this week if the Budget is seen to feed into higher inflationary pressures. Speaking to Bloomberg TV, he said: "The markets still view a cut from the BoE next week as a given. I see it more as 50-50."

Analysts at the Japanese bank, Nomura, have stated that recent inflation undershoots will prompt the Monetary Policy Committee (MPC) to lower its inflation and growth forecasts for this year. "Further ahead, we don’t expect a material revision to [the Bank’s] view on the end horizon point for either inflation or growth," they commented.