A pedestrian crosses the streets in front of The Bank of England illuminated by a ray of sunlight, in central London, on February 12, 2024.
LONDON — The Bank of England cut interest rates by 25 basis points Thursday, even as Labour's bumper budget announcement muddies the outlook for future policy easing.
The BOE's Monetary Policy Committee voted 8-1 in favour of the decision to bring the bank's key rate to 4.75%. It marks the central bank's second such reduction this year, after it began its easing cycle in August.
Policymakers pointed to a continued easing of inflation in their decision, adding that further cuts could be expected if price growth remains stable.
However, the bank said it now expects inflation to tick up slightly in 2025, rising to around 2.75%, before falling back to its 2% target.
Money markets had been pricing in a 97% chance of the quarter-point trim at the November meeting, even as analysts have warned that subsequent cuts could be delayed as a result of the government's tax-and-spend budget.
Investors will now be listening closely to comments from Governor Andrew Bailey and his colleagues about their latest outlook for the economy in the wake of the budget and the U.S. presidential election.
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"Prospects for stronger 2025 growth are likely to reduce the urgency for sequential cuts in the near term," Goldman Sachs said in a note last Thursday.
Policymakers signaled a "gradual approach" to cuts after holding rates steady at their September meeting. However, economists had upped their expectations of a faster pace of easing following a sharp fall in inflation to 1.7% and a drop off in wage growth prior to the budget.
Those expectations were later dampened after U.K. Finance Minister Rachel Reeves announced £40 billion ($51.41 billion) in tax hikes and a change to the U.K.'s debt rules, which the Office for Budget Responsibility (OBR) warned could push up near-term growth and inflation.
British bond yields shrink back
U.K. borrowing costs retreated after the Bank of England implemented its second interest rate trim this year. The yield on Britain's 10-year and 2-year bonds — known as gilts — lost nearly 2 and 4 basis points at 12:15 p.m. London time, respectively.
A bond's yield typically moves inversely to its price and in line with interest rates.
— Ruxandra Iordache
Finance Minister Reeves welcomes rate cut
U.K. Finance Minister Rachel Reeves welcomed the BOE's rate cut Thursday but acknowledged that the economic pressure on families remains strong.
"The 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 Conservatives' mini-budget. That's why we are taking the long term decisions to fix the foundations and deliver change," Reeves said in a post on social media.
The chancellor was referring to former opposition Prime Minister Liz Truss' infamous October 2022 tax-cutting mini-budget, which resulted in major swings in bond market and emergency intervention from the Bank of England.
Reeves' comments come amid concern that her own tax-rising budget could boost growth and inflation.
— Karen Gilchrist
Sterling picks up after rate cut
Sterling ticked higher after the Bank of England announced its second interest rate cut this year, up 0.39% against the U.S. dollar at 12:11 p.m. in London, while the euro lost 0.07% against the British pound.
Interest rate trims typically reduce support for a country's currency. Foreign exchange markets this week have been dominated by the rippling effect of the U.S. election.
Currency markets may also be taking guidance from the BOE's cautious tone on the trajectory of potential future rate cuts:
"We need to ensure inflation stays low. So we will not cut rates too quickly or too much," it said in its November report.
— Ruxandra Iordache
Bank of England cuts rates by 25 basis points
The Bank of England on Thursday cut interest rates by 25 basis points, marking its second trim this year.
The widely anticipated reduction brings the central bank's key rate to 4.75% after it began its easing cycle in August.
— Karen Gilchrist
Trump's election could speed up 2025 rate cuts, UBS says
President-elect Donald Trump's victory in the U.S. election could speed up the pace of Bank of England rate cuts in the second-half of 2025, UBS said Thursday.
While Trump's proposed tariffs have broadly been seen as inflationary, the resultant "loss of consumer and corporate confidence" could potentially have a disinflationary effect, analysts at the bank said.
Those pressures are likely to primarily impact Europe — for whom the U.S. is its biggest trading partner — ultimately speeding up the pace of rate cuts from the European Central Bank. UBS now sees the ECB taking interest rates back to the 2% neutral level as soon as June 2025.
However, they could filter through to the Bank of England's monetary policy from the middle of the year, the analysts added.
"For the Bank of England, we look for a more modest cutting pace as growth is more robust and the UK government has announced large fiscal easing. However, risks to a faster pace of cuts in 2H25 are rising," the note said.
Budget seen slowing pace of rate cuts
The Bank of England is largely seen pressing pause on rate cuts in December, according to analysts, as Labour's tax-and-spend budget boosts forecasts for growth and inflation.
J.P. Morgan's U.K. economist Allan Monks said in a note on Monday that BOE policymakers are likely to stick with their previously signaled "gradual approach" to rate cuts and keep the base rate above 4% through 2025.
"With the budget set to fuel inflation, we expect the BoE to continue to stress a gradual approach to monetary policy easing, setting the stage for a December pause," Danske Bank agreed in a note Thursday.
In a note last week, Goldman Sachs said it now sees a third trim coming in February, with the central bank "cutting sequentially" thereafter to bring its key rate to 3% by November.
Citi on Tuesday echoed those calls for a February cut, but noted that "greater fiscal activism" from the government gave reason for caution. It forecast consecutive cuts from May, without specifying a number of reductions.
— Karen Gilchrist
Sweden's Riksbank cuts rates by bumper 50 basis points
Sweden's Riksbank cut interest rates by 50 basis points on Thursday and signaled further trims to come as global central banks are seen syncing their monetary policy easing.
The bumper reduction — its first such move in a decade — brings the bank's key rate to 2.75% and follows a previous 25 basis points cut in September.
"If the outlook for inflation and economic activity remains unchanged, the policy rate may be cut again at the next monetary policy meeting in December and during the first half of 2025," the bank said in a statement.
— Karen Gilchrist
UK bond yields slip ahead of rate decision
U.K. borrowing costs ticked slightly lower Thursday ahead of the Bank of England's rate decision, softening a recent rally that has pushed gilt yields to their highest level in more than a year.
The 10-year gilt yield slipped two basis points to trade at 4.536% by 9:30 a.m. London time, while the 2-year gilt yield was three basis points lower at 4.481%. Yields move inversely to prices.
Bond yields spiked last week as investors pondered the extent of excess borrowing and increased taxes announced in the Labour government's Oct. 30 budget. That rally has since continued into this week, with 10-year yields hovering near their highest level since October 2023 following the conclusion of the U.S. presidential election on Wednesday.
— Karen Gilchrist
Sterling ticks up ahead of interest rate cut
Sterling picked up on Thursday despite broad expectations that the Bank of England will trim interest rates.
The British pound was up 0.38% against the U.S. dollar and 0.25% higher against the euro at 8:43 a.m. London time.
Interest cuts typically pressure down currency. Investor focus will now shift toward whether the Bank of England will continue on the path of monetary easing, given the recent release of its tax-hiking budget that some economists see as potentially inflationary.
— Ruxandra Iordache
U.S. Federal Reserve readies to cut rates Thursday
The U.S. Federal Reserve is also set to deliver its latest interest rate decision on Thursday, following the conclusion of the U.S. presidential election.
The Fed is expected to cut rates by 25 basis points, having kicked off its rate cutting cycle with a jumbo 50 basis points reduction in September.
— Karen Gilchrist
Sharp dip in inflation paves the way for rate cut
U.K. inflation fell sharply to 1.7% in September, ramping up expectations for a November rate cut from the Bank of England.
The reading, which came in below expectations, marked a significant decline from August's 2.2% print and the first time inflation has fallen below the BOE's 2% target since April 2021.
Analysts have suggested that the decline could be short-lived, however, with an increase in the regulator-set energy price cap likely to push up prices slightly last month.
— Karen Gilchrist
Britons brace for higher mortgages despite rate cut
Britons are facing the prospect of higher mortgage rates for longer after the government's tax-and-spend budget threw off expectations for a series of near-term interest rate cuts.
Mortgage rates took a hit last week when a number of lenders raised borrowing costs amid concerns that Reeves' fiscal plans could push up growth and inflation, thereby delaying the BOE's easing path.
"It's confusing times for mortgage borrowers when expectation is for a base rate cut ... but fixed rates look set to rise," David Hollingworth, associate director at broker L&C Mortgages, said in a statement Friday.
Virgin Money became the first major lender to raise mortgage rates after the budget, lifting them by 0.15%. Some banks diverged on their outlook, however, with Santander reducing rates by 0.36%.
The average five-year fixed mortgage rate is now at 4.64%, down from 5.36% last year, while the average two-year fixed rate is 4.91%, down from 5.81% over the same period in 2023, data from property portal Rightmove showed last week.
"This isn't the radical spike in rates that have blighted mortgage rates in the last couple of years. But if funding costs don't ease, the sub 4% 5-year fixed rates that we've become used to in recent months could be under threat," Hollingworth continued, noting that more lenders might reconsider their rates going forward.
— Karen Gilchrist
