UK borrowing costs are set to be cut for the second time this year, despite tax changes and a Donald Trump victory in the US casting uncertainty over the future path of interest rates.
Most economists think policymakers at the Bank of England will opt to reduce interest rates to 4.75% on Thursday.
Rates currently sit at 5% after being cut by 0.25 percentage points in August, the first reduction since 2020, then kept the same in September.
Since then, the latest official data showed UK Consumer Prices Index (CPI) inflation fell to 1.7% in September, the lowest level since April 2021.
The slowdown, from 2.2% in August, was driven by a sharp slump in petrol prices and lower airfares.
Experts said inflation falling below the Bank’s 2% target level will encourage policymakers to continue easing interest rates, releasing some more pressure on borrowers and mortgage holders across the UK.
Andrew Goodwin, chief UK economist for Oxford Economics, said the outcome of the Bank’s Monetary Policy Committee (MPC) meeting “looks virtually certain”, although some members could still opt for rates to be kept the same.
MPC members Huw Pill and Megan Greene are the most “unpredictable”, he said, with lingering concerns over services sector inflation and wage growth.
The Monetary Policy Committee meets in the week after Chancellor Rachel Reeves announced almost £70 billion of extra annual spending, funded by business-focused tax hikes and additional borrowing.
The Office for Budget Responsibility (OBR) said the sharp increase in spending will contribute to higher inflation, although it will also help drive stronger economic growth.
Inflation is forecast to average 2.5% this year and 2.6% next year before coming down, assuming “the Bank of England responds” to help bring it to the target rate, the OBR said.
It has prompted economists to reel in predictions for a rapid succession of rate cuts over the next year.
James Smith, developed market economist for ING, said: “The Budget won’t change the Bank’s decision to cut rates again this week.
“But it does question our long-held view that rate cuts will speed up from now on.
“The risk is that this happens later, and the Bank decides to keep rates on hold again in December.
“A cut at the final meeting of the year looks fairly 50:50, and a lot will depend on the two inflation reports we get between now and Christmas.”
The latest decision also comes a day after Donald Trump was declared victorious in the US presidential election.
Some economists said Mr Trump’s economic policies, including proposed tax cuts and higher trade tariffs, are inflationary.
This could prompt policymakers to keep interest rates higher for longer, with knock-on implications for monetary policy in the UK.
The US Federal Reserve will also announce the nation’s interest rate on Thursday, with financial markets also betting on a 0.25 percentage point reduction.
Why are you making commenting on The National only available to subscribers?
We know there are thousands of National readers who want to debate, argue and go back and forth in the comments section of our stories. We’ve got the most informed readers in Scotland, asking each other the big questions about the future of our country.
Unfortunately, though, these important debates are being spoiled by a vocal minority of trolls who aren’t really interested in the issues, try to derail the conversations, register under fake names, and post vile abuse.
So that’s why we’ve decided to make the ability to comment only available to our paying subscribers. That way, all the trolls who post abuse on our website will have to pay if they want to join the debate – and risk a permanent ban from the account that they subscribe with.
The conversation will go back to what it should be about – people who care passionately about the issues, but disagree constructively on what we should do about them. Let’s get that debate started!
Callum Baird, Editor of The National
Comments: Our rules
We want our comments to be a lively and valuable part of our community - a place where readers can debate and engage with the most important local issues. The ability to comment on our stories is a privilege, not a right, however, and that privilege may be withdrawn if it is abused or misused.
Please report any comments that break our rules.
Read the rules hereLast Updated:
Report this comment Cancel