Bank of England cuts rates of interest with warning over inflation
Commenting on the decision, Mr Bailey said: “Inflation is just below our 2pc target and we have been able to cut interest rates again today. We need to make sure inflation stays close to target, so we can’t cut interest rates too quickly or by too much. But if the economy evolves as we expect it’s likely that interest rates will continue to fall gradually from here.”
The Bank warned that the “combined effect” of the increase in employer NICs and a sharp rise in the minimum wage were “likely to increase the overall costs of employment”.
While the Office for Budget Responsibility (OBR), the government’s tax and spending watchdog, has said the greatest impact of this will be in lower wages, the Bank warned that firms could also choose to pass on higher costs to consumers, which would keep interest rates higher for longer as wages continue to rise.
It suggested there were already “some signs” that this scenario was materialising, with “wages and services inflation remaining elevated”.
The Bank added: “The impact of the Budget announcements on inflation will depend on the degree to and speed with which these higher costs pass through into prices, profit margins, wages and employment.”
Chancellor Rachel Reeves said: “Today’s interest 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.
“This Government’s first Budget has set out how we are taking the long-term decisions to fix the foundations to deliver change by investing in the NHS and rebuilding Britain, while ensuring working people don’t face higher taxes in their payslips.”
The OBR has warned that inflation was unlikely to return to target until 2029 as a result of the Chancellor’s spending plans, which will add more than 30bn-a-year to government borrowing.
The Bank also warned that inflation was expected to edge up from 1.7pc in September to 2.5pc by the end of the year. The increase in the energy price cap from £1,568 to £1,717 is expected to add 0.3 percentage points alone to inflation in October.
It warned that the impact of previous rate rises was yet to be felt by millions of households. Bank staff calculated that around 800,000 fixed-rate mortgages currently with an interest rate of 3pc or below would need to be refinanced every year until the end of 2027. “This means that many households who took out mortgages prior to the sharp rise in interest rates in 2021 are yet to face an increase in their mortgage costs,” the Bank said.
Read the latest updates below.
