Economists have warned that hopes for the Bank of England to make successive interest rate cuts over the next two months have been dampened by the UK government’s latest budget.
These interest rate cuts typically reduce borrowing costs for consumers and businesses over time.
The likelihood of successive cuts has declined as the market digests last week’s statement, with the probability of a cut in November currently standing at 90%, but 65.2% for another cut in December, according to Refinitiv data. This has fallen sharply since last week.
The budget, which expanded fiscal spending by 1.2% of GDP for next year, is expected to reduce slack in the economy that might otherwise help bring down inflation, according to Pantheon Macroeconomics.
“The flow of positive data over the past month that put successive interest rate cuts on the Monetary Policy Committee (MPC) table in November and December has been wiped out by the Budget,” said Robert Wood, chief economist at Pantheon.
Markets She reacted hostilely to last week’s financial statementWith the pound falling sharply and government bond yields – the interest rate paid by the government – rising.
Andrew Bailey, Governor of the Bank of England, speaks as he addresses the media during a press conference. Photo: Reuters
The Office for Budget Responsibility (OBR) expects the Budget to add 0.5 percentage points to the Consumer Price Index (CPI) in 2025.
Earlier in October, Bank of England Governor Andrew Bailey suggested that the Monetary Policy Committee could take a more “aggressive” approach to cutting interest rates if inflation data continues to improve. However, economists at Pantheon warned that the Monetary Policy Committee was now likely to act more cautiously, wary of the inflationary impact of the budget’s fiscal easing.
Pantheon said it now expects the Monetary Policy Committee to cut interest rates again this year, possibly at a meeting this week, followed by a 25 basis point cut each quarter in 2025, one point less than previously expected.
“All in all, we expect another cut this year, at this week’s meeting,” Pantheon adds. “This is lower than we expected at the time of our last forecast review. The market is taking a similar view, with pricing now reflecting 25 basis points less easing by March than before the Budget.
Market expectations have also shifted, now reflecting 25 basis points less easing by March than before the Budget.
The picture is different in the United States, where economists still expect interest rates to be cut twice before the end of the year.
Like the Monetary Policy Committee, the US Federal Reserve will meet on Thursday, one day later than usual Because of Tuesday’s electionsAs inflation continues to slow, the Federal Reserve is expected to cut interest rates for the second time this year.
Federal Reserve policymakers, led by Chairman Jerome Powell, are expected to cut interest rates by a quarter of a percentage point, to about 4.6%, after cutting half a percentage point in September. Economists expect another quarter-point cut in December, with further cuts likely next year.