Bank of England cuts rates to 4.75% as inflation cools and economic pressures ease

The Bank of England cut interest rates by 25 basis points to 4.75%, its second cut this year as inflationary pressures begin to ease and economic data point to a slowdown in wage growth.

The nine-member Monetary Policy Committee voted in favor of the cut, following a steady trend in economic forecasts pointing to a possible decline in inflationary pressures.

The rate cut comes despite new fiscal policies introduced in Chancellor Rachel Reeves’ latest Budget, which are expected to raise costs for UK businesses, including a 1.2% increase in employers’ National Insurance contributions from April. “Although interest rate cuts were expected, concerns remain about inflationary pressures from fiscal policy changes and the impact of Donald Trump’s US election victory on global trade,” noted Stuart Douglas, Director of Capital Markets at Centrus.

Trump’s proposed tariffs on imports have raised fears of a trade war that could lead to higher costs for UK businesses and consumers, impacting inflation and growth. Economists at the National Institute of Economic and Social Research warned that these factors could prompt the Bank of England to ease policy more cautiously.

At the bank’s last meeting in September, Monetary Policy Committee members took a dovish stance, keeping interest rates unchanged as some members, including chief economist Hugh Bell, expressed concerns about rising inflation in services and wage growth. With regular wage growth at its weakest level in two years, now down to 4.9%, and headline inflation falling from 2.2% in August to 1.7% in September, the bank’s decision to cut interest rates reflects changing economic conditions.

Katherine Mann, an outside member of the Monetary Policy Committee known for favoring restrictive monetary policy, remained cautious, saying tight policy remains necessary to limit inflationary behaviour. However, Bank of England Governor Andrew Bailey suggested the possibility of a “more aggressive” easing cycle, balancing the need for caution with the benefits of lowering interest rates as the economy slows.

Market data reflected some budgetary pressures, with yields on UK government bonds rising by 25 basis points after the Budget announcement – ​​a significant increase excluding the effects of the 2022 mini-Budget. Meanwhile, analysts at Nomura noted that easing inflation The slowdown in wage growth gives the bank more room to cut interest rates, and they expect further cuts next year.

Goldman Sachs expects UK interest rates to fall to 3% by September 2025, although uncertainties remain. The interest rate cut was met with cautious optimism among UK businesses. Mike Randall, CEO of Simply Asset Finance, commented that although the reduction provides some relief, further support is necessary to achieve the growth targets outlined in the Chancellor’s Autumn Statement.

“SMEs need greater certainty and more incentives to invest in long-term growth,” Randall said. He added: “In this way, the government’s goal of rebuilding Britain can be achieved.”

The latest cut is aimed at supporting the UK economy facing complex pressures from domestic fiscal policies and international trade uncertainties, paving the way for potential further adjustments as the bank monitors the evolving economic landscape.