Key Takeaways
- The Bank of England lowered interest rates to 4.75%.
- Inflation dropped to 1.7%, the lowest level since 2021.
- New UK budget measures and U.S. economic policies may limit rate cuts.
Second rate cut as UK inflation falls to 1.7%
The Bank of England lowered its main interest rate by 0.25% on Thursday, bringing it to 4.75% after inflation fell to 1.7%—the lowest since April 2021. The move, supported by eight out of nine rate-setting panel members, marks the second rate cut in three months. Lower inflation has eased borrowing costs, benefiting mortgage holders and other borrowers.
Budget-driven inflation risks
Governor Andrew Bailey warned that while inflation has declined below the bank’s 2% target, recent budget measures from the Labour government could increase price pressures, limiting the pace of future rate cuts.
Bailey explained:
We need to make sure inflation stays close to target, so we can’t cut interest rates too quickly.
He noted that significant rate reductions are unlikely, contrasting with the near-zero rates seen post-2008 crisis and during the 2020 pandemic.
Global and domestic economic risks
The UK budget, which includes £70 billion in new spending, could further boost inflation by 0.5 percentage points, according to bank estimates. Additionally, President-elect Donald Trump’s expected tariffs and tax policies in the U.S. could heighten global inflationary pressures, influencing the Bank of England’s future rate decisions. Suren Thiru of the Institute of Chartered Accountants cautioned:
Upward pressure on inflation from the budget and global risks could mean that policy is loosened more modestly than anticipated.
