Bank of England issues inflation warning as interest rates cut to 4.75 per cent

The Bank of England has issued a warning about inflation after cutting interest rates from 5 per cent to 4.75 per cent.

It marks the second time the base rate has been cut this year after it was previously slashed by 0.25 per cent in August. The Bank’s Monetary Policy Committee (MPC) announced the latest decision on Thursday.

Eight of the committee members voted in favour of cutting the base rate, versus one who preferred to keep it unchanged.

READ MORE: What Bank of England's interest rate cut means for your mortgage

Bank governor Andrew Bailey said UK inflation falling below the 2 per cent target meant policymakers had been able to cut rates to the lowest level since June last year. However, he warned interest rates will not be cut "quickly or by too much" to ensure that inflation stays close the the target, adding: "If the economy evolves as we expect, it’s likely that interest rates will continue to fall gradually from here."

The Autumn Budget, delivered by new Labour chancellor Rachel Reeves last week, which raised taxes for businesses through National Insurance, was factored into the decision making process, the MPC said.

Tax rises and a higher level of public spending are expected to boost economic growth by 0.75 percentage points at its peak in a year’s time, relative to previous forecasts published in August. The Budget is also expected to increase Consumer Prices Index (CPI) inflation by just under 0.5 percentage points in late 2026, meaning inflation will now reach the Bank’s target in the second quarter of 2027, a year later than it previously projected.

The MPC warned that there is “significant uncertainty” over the outlook for the jobs market, with businesses set to face a bigger national insurance tax bill and a higher national minimum wage from April.

The impact on inflation would “depend on the degree and speed with which those costs would be transmitted into prices, wages, employment” or absorbed into profits.

Policymakers wrote in their analysis: "On the one hand, higher labour costs could constrain firms’ cash-flows if there was limited pass-through to pricing. This in turn could moderate wage growth and further loosen the labour market through reduced labour demand.

"On the other hand, the increase in labour costs could prove more inflationary if upward pressure on prices were passed on to consumers."

Responding to the rate cut, Ms Reeves said the interest rate cut would be “welcome news” for millions of families but that households are still facing a challenge after Liz Truss’ mini-budget.

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

"This Government’s first Budget has set out how we are taking the long-term decisions to fix the foundations to deliver change by investing in the NHS and rebuilding Britain, while ensuring working people don’t face higher taxes in their payslips."