Hopes for consecutive interest rate cuts by the Bank of England over the next two months have been dampened by the UK government’s recent budget, economists have warned.
These rate cuts typically reduce borrowing costs for consumers and businesses over time.
The likelihood of back-to-back cuts slipped as the market digested last week’s statement, with the probability of a cut in November currently standing at 90%, but 65.2% for another in December, according to Refinitiv data. This is sharply down since last week.
The budget, which expanded fiscal spending by 1.2% of GDP for the coming year, is expected to reduce slack in the economy that might otherwise help lower inflation, according to Pantheon Macroeconomics.
“The positive data flow over the past month that put consecutive rate cuts on the table for the Monetary Policy Committee (MPC) in November and December has been erased by the budget,” Pantheon’s chief economist Robert Wood said.
Markets reacted with hostility to last week’s fiscal statement, with the pound falling sharply and gilt yields – the interest rate paid by the government – rising.
The Office for Budget Responsibility (OBR) forecasts the budget will 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 MPC could take a more “aggressive” approach to rate cuts if inflation data continued to improve. However, Pantheon economists cautioned that the MPC is now likely to proceed more cautiously, wary of the inflationary impact of the budget’s fiscal loosening.
Pantheon said it now expects the MPC to deliver one more rate cut this year, potentially at this week’s meeting, followed by a 25-basis-point reduction each quarter in 2025, one fewer than…
