In a move to ease economic pressures, the Bank of England has cut interest rates to 4.75%.
- This reduction follows cooling inflation and a slowdown in wage growth, offering some relief to UK businesses and consumers.
- Despite recent fiscal policies potentially increasing costs, this decision reflects cautious optimism in stabilising the economy.
- Concerns persist over international trade tensions and fiscal changes that may counteract the benefits of the rate cut.
- Market analysts predict further rate reductions, though uncertainties remain regarding future economic conditions.
The Bank of England has announced a rate cut to 4.75%, aiming to alleviate economic strains as inflation shows signs of cooling. This decision was made by the nine-member Monetary Policy Committee (MPC) in response to economic forecasts indicating a possible decrease in inflationary pressures. Recent data show a decline in regular wage growth to 4.9% and a drop in headline inflation from 2.2% in August to 1.7% in September.
Despite the positive move, new fiscal policies outlined in Chancellor Rachel Reeves’s budget may pose challenges. These policies include a 1.2% rise in employers’ National Insurance contributions from April, which is expected to increase costs for UK businesses. Stuart Douglas, Director of Capital Markets at Centrus, voiced concerns over the impact of these fiscal changes, coupled with the implications of Donald Trump’s US election victory on global trade.
Trade tensions have been heightened by proposed tariffs from the US, sparking fears of a trade war that could affect both inflation and growth in the UK. Economists from the National Institute of Economic and Social Research suggest that such factors might cause the Bank of England to adopt a more cautious approach in future policy adjustments. The MPC’s previous meeting in September reflected similar caution, with key members expressing worries about inflation in services and ongoing wage growth issues.
Amid these challenges, some market analysts, such as those at Nomura, believe that easing inflation and slower wage growth provide the Bank with greater opportunity for further rate cuts. Goldman Sachs forecasts a potential decline in UK interest rates to 3% by September 2025, indicating a more sustainable economic environment if these trends continue. Meanwhile, the market reaction to the budget has been mixed, with a notable increase in UK government bond yields.
The reaction among businesses has been cautiously optimistic. Mike Randall, CEO of Simply Asset Finance, acknowledges the relief the rate cut offers but stresses the need for additional support to achieve growth targets as outlined in the Chancellor’s Autumn Statement. He emphasises that SMEs require more certainty and investment incentives to drive long-term growth. As the UK economy navigates complex pressures, the latest rate cut is seen as a strategic decision to support growth amidst domestic fiscal policies and global trade uncertainties.
The recent interest rate adjustment by the Bank of England underscores its strategic approach to supporting economic stability amid ongoing fiscal and international challenges.
