Next interest rates cut is 'nailed on' but the future is far less clear

Millions of mortgage holders and borrowers are set for some relief next week with a cut in interest rates “nailed on” but the Budget has cast uncertainty over further easing in the coming months.

The Bank of England trimmed interest rates by a quarter point to 5 per cent at the start of August but chose to sit on its hands at its last rate-setting meeting in September. Since then the annual rate of consumer price inflation has fallen to 1.7 per cent - below the central bank’s 2 per cent target.

The Bank of England’s nine-strong monetary policy committee (MPC) is due to meet this coming Thursday, November 7, and most economists are predicting a further quarter-point cut, which would take the bank base rate down to 4.75 per cent. However, a similar move at the following meeting on December 19 is looking less certain.

Bank of England policymakers face a delicate balancing act when it comes to future interest rate decisions. | Canva / Scotsman

Thomas Pugh, economist at audit, tax and consulting firm RSM UK, said: “The combination of a sharp drop in inflation to below 2 per cent and a big slowdown in wage growth to below 4 per cent means a [quarter point] rate cut at next week’s MPC meeting is nailed on. An 8-1 vote, or even a 9-0, looks likely.

“However, after the huge fiscal loosening in the Budget, interest rates are likely to fall more slowly over the course of the next year. Indeed, a sequential rate cut in December now looks unlikely.

“What’s more, the MPC is unlikely to double down on [Bank of England] governor Andrew Bailey’s comments that the bank could move more aggressively to cut rates and will probably reiterate its guidance about cautious and gradual cuts. We now expect just one rate cut this year and at most four cuts in 2025, meaning rates will finish the year [2025] at around 3.75 per cent.”

Concerns over the additional borrowing set out in the Budget earlier this week by Chancellor Rachel Reeves have led to investors dumping gilts. That could lead to interest rates staying higher for longer, particularly if the additional tax burdens imposed on businesses by the Budget feed through to higher or stickier inflation.

Matthew Ryan, head of market strategy at global financial services firm Ebury, said: “The Labour government has pledged itself to a higher tax burden, greater borrowing and increased spending, but markets do not yet appear convinced that this will be enough to boost UK growth. Indeed, today’s near 15 basis point bounce in the ten-year gilt yield suggests that investors are not at all comfortable with the borrowing plans unveiled.”

Laith Khalaf, head of investment analysis at AJ Bell, noted: “Previously, market expectations were for the base rate to fall to 4.5 per cent by the end of this year, and then to under 4 per cent by the middle of 2025. But the inflationary nature of the measures announced in the Budget are forecast by the Office for Budget Responsibility to add 0.4 per cent to CPI inflation in the next tax year, thereby putting pressure on the Bank of England to keep rates at higher levels for longer.”