The Bank of England has forecast Rachel Reeves’s first budget as chancellor will increase inflation by up to half a percentage point over the next two years, contributing to a slower decline in interest rates than previously thought.
Announcing a widely anticipated 0.25 percentage point cut in the base rate to 4.75%, the Bank’s Monetary Policy Committee (MPC) forecast that inflation will return “sustainably” to its target of 2% in the first half of 2027, a year later than at its last meeting.
The Bank’s quarterly Monetary Policy Report found Ms Reeves’s £70bn package of tax and borrowing measures will place upward pressure on prices, as well as delivering a three-quarter point increase to GDP next year.
Governor Andrew Bailey stressed however that the underlying trend was “continued progress in disinflation”.
He said: “We’ve cut interest rates today so that is significant in the context of the news. Yes, there is some upward effect on inflation, but the path of inflation as we’ve set out, we think, returns to the target by the horizon that we look at and that is what has given us support for cutting rates today.
“Inflation is just below our 2% target and we have been able to cut interest rates again today,” said Mr Bailey.
“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.”