The Bank of England (BoE) has cut its benchmark interest rate by 25 basis points from 5% to 4.75%, marking the second easing of monetary policy this year. This decision, which follows a majority vote of eight to one by the Monetary Policy Committee, aligns with market expectations.
In September, the UK's Consumer Price Index (CPI) fell below the central bank's target of 2% for the first time in three and a half years, supporting the decision for this rate cut. Nonetheless, the inflation risk remains, indicating that the BoE may adopt a slower pace of rate cuts compared to the European Central Bank (ECB).
Complicating factors include a new budget proposed by the Labour government, which features a £40 billion tax increase. This fiscal policy is expected to contribute to inflation pressure, prompting a revaluation in the bond market.
Despite the rate cut, the British pound strengthened while major stock indices weakened. The FTSE 100 index closed 0.06% lower, with a further drop at the next opening. The pound rose by 1% against the dollar, closing with an intraday gain of 0.84%.
Looking ahead, market speculation suggests only a 15% probability of another 25 basis point rate cut in December. The BoE is expected to cut rates two to three times next year, fewer than the four cuts anticipated before the budget announcement.
The fiscal policy announced by Chancellor Reeves, which includes increased taxation and government spending, is expected to result in modest economic growth but higher inflation over the next few years. This could affect the BoE's future decisions on interest rates. Additionally, potential geopolitical and trade tensions, particularly involving the US, may pose risks to the UK's economic outlook.
Recent volatility in the UK bond market seems to be stabilizing, though upward pressure on yields remains due to the anticipated inflation impacts of the new budget. Analysts suggest that yield increases may be limited, given the overall inflationary outlook and uncertainties surrounding fiscal implementation.
