Bank of England continues gradually reducing interest rates

The MPC voted 8-1 in favour of reducing its policy interest rate from 5% to 4.75% at its meeting on 7 November. This represented a large swing from the 8-1 vote to keep rates unchanged at the September MPC meeting.

The Monetary Policy Report released at the conclusion of the November meeting showed that inflation in the UK has been lower than the Bank expected in August (see Chart 1). However, inflation is still projected to rise in the coming months due to base effects for energy prices and is now expected to decline at a slower pace than previously anticipated.¹ In part, this reflects the forecast impact of the UK’s Autumn budget.²  

Chart 1. BoE inflation forecast (% change, year-on-year)

Source: Bank of England. Data as at 07 November 2024.

The Bank’s November forecast is conditioned on a market implied path for Bank rate which includes four rate cuts in 2025 and that would see the policy rate end the year at 3.75%. The fact that the Bank forecasts inflation declining to the 2% price stability target by the end of the forecast horizon implies that it is comfortable with these expectations.

Ahead of the Autumn budget, the MPC signalled that it was closely watching factors such as services inflation and wage growth. It is therefore notable that services inflation declined sharply from 5.6% year-on-year (YoY) to 4.9% YoY in September (see Chart 2). In addition, the shorter-term trends are also showing improvement (Chart 2), suggesting that inflation should be expected to trend lower in the months ahead.

Chart 2. Services inflation (% change)

Source: LSEG Data & Analytics, Bank of England and EFGAM calculations. Data as at 07 November 2024.

With regards to wages, the rate of expansion of private sector average weekly earnings has been declining since June 2023 (see Chart 3). The MPC highlighted that the UK labour market continues to loosen, although it remains tight by historical standards. Wage growth is projected to decline further to 3.2% by Q4 2025.

Chart 3. Private sector average weekly earnings (% change, year-on-year)

Source: Bank of England. Data as at 07 November 2024.

The post-meeting summary included the statement that “a gradual approach to removing policy restraint remains appropriate”.³ In part, this caution reflects the uncertainty generated by the UK Autumn budget, the effects of which the Bank noted it will continue to monitor closely. As such, it is likely that the next rate cut comes in February. However, if inflation and labour markets continue to evolve as they have done over the past couple of months, then it is possible that the pace of rate cuts accelerates after February, particularly if the budget turns out to be less inflationary than anticipated. While this is not our base case, it is still a scenario worth considering as it is not priced in by markets.

¹ https://www.bankofengland.co.uk/monetary-policy-report/2024/november-2024
² See previous Macro Flash Note ‘UK Autumn budget delivers tax increases to fund higher spending’. Available at https://www.efginternational.com/uk/insights/2024/uk_autumn_budget_delivers_tax_increases_to_fund_higher_spending.html
³ https://www.bankofengland.co.uk/monetary-policy-summary-and-minutes/2024/november-2024