LONDON (AP) — The Bank of England will cut interest rates for the second time in three months later Thursday as inflation fell to the lowest level in more than three years.
However, economists warn that concerns about future price developments following the new Labor government’s tax hike last week and the economic impact of newly-elected US President Donald Trump could limit the number of cuts next year.
For now, however, the Bank of England is widely expected to cut its key interest rate by a quarter of a percentage point to 4.75%. In August, the bank’s nine-member Monetary Policy Committee cut borrowing costs for the first time since the early days of the coronavirus pandemic in spring 2020.
Central banks around the world dramatically increased borrowing costs from near zero during the pandemic, as prices began to rise, first due to supply chain problems and then due to Russia’s large-scale invasion of Ukraine, which sent energy costs soaring. As inflation has recently fallen from its highest level in decades, these central banks have started cutting interest rates.
Analysts say policymakers are likely confident that inflationary pressures in the UK economy have eased enough to further ease the financial burden on businesses and mortgage holders. In the year to September, inflation was 1.7%, the lowest level since April 2021 and below the central bank’s target rate of 2%.
The decision comes a month after Treasury chief Rachel Reeves announced about 70 billion pounds ($90 billion) in additional spending, financed by higher business taxes and borrowing. Economists think the splurge, combined with the prospect of companies absorbing tax increases by raising prices, could lead to higher inflation next year.
“The Budget will not change the bank’s decision to cut rates again… but it does challenge our long-held view that interest rate cuts will accelerate from here on out,” said James Smith, economist at ING.
The tariff decision also comes a day after Trump was declared the winner of the US presidential election. He has indicated he will cut taxes and impose tariffs on certain imported goods when he returns to the White House in January. Both policies have the potential to be inflationary both in the US and globally, prompting Bank of England policymakers to keep interest rates higher than initially planned.
The US Federal Reserve is also expected to look past the implications of a second Trump presidency when it concludes its latest policy meeting on Thursday. Like the Bank of England, the Fed will also cut its key interest rate by a quarter of a percentage point.
