LONDON — The Bank of England cut its key interest rate for the second time this year, saying it was increasingly confident that inflation is coming under control.
The Monetary Policy Committee voted decisively to lower the Bank Rate by 0.25 percentage points to 4.75 percent. External member Catherine Mann, typically the most hawkish voice on the MPC, cast the only vote for no change.
But it warned that it now sees inflation staying above its 2 percent target for longer than previously, due partly to the new Labour government’s spending plans.
“There has been continued progress in disinflation, particularly as previous external shocks have abated,” the Bank said in a statement. But it warned that “remaining domestic inflationary pressures are resolving more slowly.”
It repeated that “a gradual approach to removing policy restraint remains appropriate,” and said that policy “will need to continue to remain restrictive for sufficiently long until the risks to inflation returning sustainably to the 2 percent target in the medium term have dissipated further.”
“We need to make sure inflation stays close to target, so we can’t cut interest rates too quickly or by too much,” said Governor Andrew Bailey.
The headline rate of inflation fell to 1.7 percent in September, comfortably below the Bank’s medium target. It also cut its forecast for year-end inflation, now seen at 2.4 percent versus the 2.7 percent it had predicted in August. But the Bank now estimates it will take a lot longer to return to target sustainably. While in August the BoE had expected that by the start of 2026, its new median forecast only sees it happening in the second quarter of 2027, a full 18 months later.
Part of this is down to Chancellor Rachel Reeves’s autumn budget, which promises an extra £70 billion in spending next year. In its new Monetary Policy Report, the Bank wrote that it expects the budget to push inflation up by just under 0.5 percentage points at its peak in a year’s time. The extra government spending is also expected to boost gross domestic product by about 0.75 percentage points.
A Trump-shaped hole
Conspicuously absent from the MPR was any explicit mention of Donald Trump and his wide-ranging tariff proposals. The Republican president-elect only became the clear winner by the time the Bank had already convened on Wednesday, but he’s been vocal about his desire to renew the trade war he started in his first term in office, floating tariffs of 10 or 20 percent across the board on all of America’s trade partners.
The BoE didn’t directly address the threat to trade relations between the U.K. and its largest single export market, but it did write that, while expects import prices to take longer to come down than it previously thought.
“Taken together these effects are expected to raise U.K. [headline] inflation by 0.2 [percentage points] relative to the August report,” it writes. Export prices and currency exchange rates have stayed subdued in recent months, the Bank noted, but it flagged the possibility of “large movements in sterling or in world export prices in the future, or in the presence of large and heterogenous shocks in the prices of different goods.”
Murky outlook
The Bank stressed multiple times that there was extreme uncertainty over the future path of inflation. Data for the labor market in particular “are difficult to interpret” while growth in wages “has been more elevated than usual relationships would predict.” The Office for National Statistics has been warning that the quality of its labor data has declined because fewer people are answering its surveys.
Recent disinflationary pressure has been concentrated in more volatile categories like energy. As that effect fades, the downward pressure on prices will ease. Inflation in the prices of services, meanwhile, is expected to remain “broadly unchanged” over the next six months.
Service prices are closely linked to wages. The Bank wrote that while average weekly earnings had “fallen back significantly” since the middle of the year, they remained elevated, growing at an annual pace of 4.8 percent in the three months to August.
(This story is being updated)
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