Bank of England forecasts to lower Interest Rate this week

The Bank of England is expected to lower interest rates this week, while markets are betting on fewer cuts next year after forecasts suggested the new government’s first Budget will push up inflation.

Analysts predict members of the Monetary Policy Committee (MPC) will vote to cut the central bank’s base rate by a quarter-point to 4.75 per cent at their next meeting on Thursday.

Official figures last month boosted hopes of a cut as inflation fell to 1.7 per cent, its lowest level since April 2021, and stickier services inflation also dropped.

Meanwhile, data showed wage growth eased again to its lowest level in two years. Average pay growth, excluding bonuses, fell to 4.9 per cent in the three months to August, down from 5.1 per cent in the previous quarter.

The Bank cut rates in August for the first time since March 2020 but opted to leave them on hold in September.

Policymakers appear to be taking a cautious approach to easing monetary policy, with inflation expected to rise over the coming months amid increases in household energy prices and oil price shocks caused by conflict in the Middle East.

Another cut in December is therefore considered unlikely, and the Budget has spurred markets to further dial back their expectations.

Investors now predict fewer than four quarter-point cuts next year, compared to almost five before the Autumn Statement.

The Office for Budget Responsibility (OBR) said last week that the sharp increase in spending from the Budget would contribute to higher inflation and put pressure on interest rates.

Chancellor Rachel Reeves announced nearly £70bn of extra annual spending, funded by tax hikes focused on businesses and additional borrowing.