Bank of England cuts UK interest rates to 4.75%

The Bank of England has cut interest rates for the second time this year and signalled that further reductions are likely, but the prospect of another rate cut before Christmas has diminished amid concern over the impact on inflation of the Labour budget and US election.
The central bank’s nine-strong monetary policy committee (MPC), the panel that sets the level of borrowing costs in the UK economy every six weeks, voted 8-1 in favour on Thursday to cut the base rate by 0.25 percentage points to 4.75 per cent from 5 per cent.
It is the second reduction in borrowing costs this year. The MPC voted narrowly 5-4 in favour of reducing the base rate by a quarter point in August, the first cut since 2020, and then left it unchanged at its last meeting in September.
Andrew Bailey, governor of the Bank of England, said: “If the economy evolves as we expect it’s likely that interest rates will continue to fall gradually from here.”
He added, however: “We need to make sure inflation stays close to target, so we can’t cut interest rates too quickly or by too much.”
Another reduction at the MPC’s next meeting in December has now been all but priced out by investors. According to the latest market curve, investors think that the Bank will lower borrowing costs two or three times next year.
The pound strengthened 0.88 per cent against the US dollar to $1.299 and rose by 0.17 per cent against the euro to €1.202. The FTSE 100 dropped by 0.03 per cent to 8,164.15.
Rob Wood, chief UK economist at Pantheon Macroeconomics, a consultancy, said he expected the MPC to keep rates on hold next month and cut them by 25 basis points in February.
“The MPC is now dealing with two new inflation shocks: Trump and the budget,” Wood said, adding: “Repeated inflation shocks risk looking permanent to consumers. That means more hawkish interest rate policy from the MPC.”
Thomas Pugh, an economist at RSM UK, the consultancy, added: “The budget and US election result have significantly reduced the chances of the MPC cutting rate sequentially, but it hasn’t taken it to zero.”
Rachel Reeves, the chancellor, said the 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 previous government’s mini-budget”.
Reeves’s inaugural budget last month, in which she raised taxes by £40 billion, boosted government spending and public investment, will lift economic growth in the short term by about 0.75 per cent, the Bank of England said, slightly higher than the Office for Budget Responsibility, the spending watchdog, predicted.
The MPC expects the economy to expand by 1 per cent this year, lower than its earlier prediction of 1.25 per cent. Growth then picks up to 1.5 per cent in 2025, an upgrade of half a percentage point, before declining to 1.25 per cent in 2026 and 2027.
Although the stimulatory budget measures are expected to raise economic activity in the near term, the chancellor’s package is expected to push up inflation by just under half a percentage point at its peak. The MPC said that it now does not expect inflation to return to its 2 per cent target until 2027, slightly later than previously thought, reaching 2.8 per cent in the second half of next year, partly owing to higher energy prices.
Rate setters said that the chancellor’s decision to increase the rate of employers’ national insurance contributions by 1.2 percentage points to 15 per cent, amounting to a £26 billion tax increase, would push down wages and lead to “reduced labour market participation”. This change is forecast to actually yield £16 billion owing to lower salary growth in the long term.
The chancellor extended the fuel duty freeze at the budget for another year. The MPC said that, if this duty were to increase in line with RPI inflation in 2026 as planned, it would add slightly more than 0.1 percentage points to headline inflation.
From 2026, fiscal policy, the government’s tax and spending policies, will tighten and constrain the economy, helping to keep inflation in check, the MPC said.
Bailey and Huw Pill, the Bank’s chief economist, voted to loosen policy by a quarter point. The governor voted to lower rates in August but Pill favoured keeping them unchanged. Members who voted for the rate cut cited “continued progress in disinflation”.
According to the Office for National Statistics, inflation slid to 1.7 per cent in September from 2.2 per cent in the previous month, well below the Bank of England’s expectations. Services inflation, closely watched by the MPC, fell faster than projected over the same period as well.
Catherine Mann, an external member of the MPC, was the only panellist who voted to leave borrowing costs unchanged at 5 per cent. According to the meeting minutes, Mann thought that robust demand caused by the budget meant that monetary policy should remain unchanged.
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Donald Trump’s victory in the US presidential election was not factored into the MPC’s economic forecasts. The incoming 47th US president has consistently said he intends to implement a tariff of up to 20 per cent on all imports and a larger 60 per cent tariff on Chinese goods, which economists have warned could increase inflation and force central banks to lower interest rates more cautiously.
The US Federal Reserve, the American central bank, was expected to announce its own quarter-point reduction to the federal funds rate later on Thursday, taking it down to a range of 4.5 per cent to 4.75 per cent. The Fed lowered rates by 50 basis points in September.