UK interest rates cut to 4.75%, as Bank of England warns budget will add to inflation – business live

AXA Investment Managers are sticking with their forecast of one quarter-point cut to UK interest rates per quarter next year.

That would bring Bank rate down to 3.75% at the end of 2025.

Gabriella Dickens, their G7 econmust adds:

Further ahead, though, we think there is a risk that ongoing sluggish demand – as households struggle to ramp up spending in a world where real wages are rising only modestly and mortgage rates are higher than they otherwise would have been – will lead to excess supply opening up earlier than the Bank anticipates, exacerbated by our expectation of a material slowdown in the US in 2026.

As a result, we think there is scope for additional cuts into 2026, whereas the market has Bank Rate broadly flat from the end of next year.

Bond trading giant Pimco is “sceptical” that the UK budget will drive inflation meaningfully higher.

Pimco economist Peder Beck-Friis says:

While the budget increases near-term borrowing, fiscal policy is still set to remain tight ahead. As a result, we continue to expect inflation to cool and the BOE to eventually pivot to a more dovish stance, cutting more than what is priced into financial markets.

As such, we haven’t changed our view on gilts, which we continue to find attractive.

Bank of England summary

The Bank of England now faces a “key and new uncertainty” about how companies respond to higher National Insurance contributions announced in the budget, says Sandra Horsfield of Investec.

Horsfield explains:

Should they pass these on in the form of higher prices, this could be a new upside risk to inflation persistence – a line of thinking embedded in Catherine Mann’s hawkish dissent.

On the other hand, if pricing power is limited, companies may compensate for this by lowering planned wage growth and staff levels, which would mean more downward influences on inflation. The MPC has chosen a middle path as its baseline, but stressed uncertainties on both sides – and its willingness to react should that judgement be wrong.

City firm TS Lombard predict the Bank will manage five more quarter-point cuts to UK interest rates by the end of next year.

That’s despite the inflationary pressures from the Budget, and possibly from nre US tariffs.

TS Lombard told clients:

We still pencil in Bank Rate at 3.5% by yearend 2025.

To us, the balance of risks looks skewed to an accelerated easing cycle, i.e., a scenario where faltering employment and quicker wage disinflation all but eliminate policymakers’ remaining concerns about the persistence of domestic CPI inflation – with lower interest rates helping to keep the public debt interest bill in check.

ING developed markets economist, James Smith, agrees that another rate cut next month is unlikely:

“Nobody will be very surprised to learn that the Bank of England has cut interest rates this month. Bank Rate has been taken a quarter point lower for the second time this year, which leaves it at 4.75%.

Instead, everyone wanted to know what the Bank made of the latest budget. Big spending increases will, investors have assumed, reduce the scope of the BoE’s rate-cutting cycle.

“In short, the Bank is refusing to be drawn on where interest rates are likely to go next. It was always very unlikely that Governor Andrew Bailey would also choose to double down on his comments a month ago when he hinted that rate cuts could become “more aggressive”.

Interestingly, the Bank has used its latest Monetary Policy Report to play down the latest fall in services inflation which, at 4.9%, is well below the Bank’s forecast from August. Like us, it expects those numbers to stay broadly unchanged into the end of the year.

Smith also predicts the Bank will have managed six more cuts by next autumn:

If services inflation continues to fall more meaningfully next year, as many of the surveys seem to indicate, then we think we are still likely to see rate cuts accelerate.

Remember, markets are pricing fewer than three rate cuts from here on in. That would leave UK rates more than two percentage points above the European Central Bank in a year or so. We don’t think that sounds particularly realistic. Our view is that rate cuts will be cut at every meeting from February until rates reach 3.25% next autumn.”

The TUC have welcomed today’s cut to UK interest rates, saying it will help households and businesses.

TUC General Secretary Paul Nowak hopes the Bank will press on with further cuts:

“Today’s rate cut was the right decision, and the Bank of England should now keep moving with further reductions.

“With inflation below the government’s target, ongoing cuts will support the economy and relieve cost of living pressures on households and businesses.

“It’s good that the Bank’s forecast has recognised the gains to growth that October’s Budget will bring.

“With increased investment, stronger public services and lower interest rates, the process of repairing and rebuilding Britain has begun.”

Over in Prague, the Czech National Bank has cut its interest rate, following both the UK and Sweden today.

At its latest policy meeting, the CNB Bank Board lowered its two-week repo rateby 0.25 percentage point to 4.0%

It has also lowered the discount rate by the same amount to 3.0% and the Lombard rate [charged by central banks on short-term loans to commercial bank backed by collateral] to 5.0%.

December rate cut looking unlikely

Trump trade drives Wall Street to record high

Rachel Reeves may count herself lucky that the news this week has been dominated by Donald Trump’s return to the White House rather than the Bank of England’s latest decision on interest rates, our economics editor Larry Elliott writes:

It was always nailed on that the Bank would deliver a November cut in interest rates, and borrowing costs have duly been shaved from 5% to 4.75%. Of far more interest was what happens next and here the message was that the budget has made the Bank’s monetary policy committee (MPC) warier about the pace of future policy easing.

The Bank estimates that the increases in spending announced by Reeves last week will mean quarterly growth in a year’s time will be 1.7% as opposed to the 0.9% it was forecasting in August. Inflation, as measured by the consumer prices index, will be 2.7% rather than 2.2% and it will take a year longer, until early 2027, for the government’s preferred measure of the cost of living to return to its 2% target.

Over in the US, the number of new Americans seeking unemployment support remained low last week.

The number of seasonally adjusted initial claims for jobless benefits rose to 221,000 last week, an increase of 3,000 from the previous week, but still a historically low level indicating the labour market remains robust.

The path to future UK interest rates cuts has been “muddied” by Rachel Reeves’s Budget and the election of Donald Trump as US president, says Laith Khalaf, head of investment analysis at AJ Bell.

Khalaf adds:

Both these events have the potential to be inflationary, which would mean interest rates staying higher for longer. That doesn’t necessarily imply rates won’t come down, but the pace of decline is likely to be slower.

“The market is still pricing in another [UK] rate cut either in December or February, and then another one by May 2025. There are some more bullish voices out there, including Goldman Sachs who have forecast UK base rate to fall to just 2.75% by next Autumn. The fact the decision to cut rates was almost unanimous will put some powder in this argument. But if Donald Trump pushes ahead with a restrictive trade policy, that would really put the cat amongst the pigeons when it comes to UK inflation and interest rates.