Bank of England cuts UK interest rates

The Bank of England (BoE) has cut interest rates for the second time this year, providing some respite for the fleet and leasing sector.

The Bank’s Monetary Policy Committee (MPC) voted by a majority of 8–1 to reduce the rate by 0.25 percentage points, to 4.75%. 

One member preferred to maintain the Bank's interest rate at 5%.

The MPC says there has been continued progress in disinflation, particularly as previous external shocks have abated, although it added that remaining domestic inflationary pressures are “resolving more slowly”.

CPI inflation fell to 1.7% in September but is expected to increase to around 2.5% by the end of the year as weakness in energy prices falls out of the annual comparison. 

Services consumer price inflation has fallen to 4.9%. 

Annual private sector regular average weekly earnings growth has continued to fall but remained elevated at 4.8% in the three months to August. 

Headline GDP growth, said the Bank, is expected to fall back to its recent underlying pace of around 0.25% per quarter over the second half of this year. 

The MPC says that the labour market continues to loosen, although it appears relatively tight by historical standards.

Philip Nothard, insight director at Cox Automotive, said: “The Bank of England's decision to reduce the base rate by 0.25% to 4.75% is a welcome and much-needed move in today's volatile and uncertain economic climate.

“This reduction, following recent tax announcements in the Autumn Budget, provides crucial support for businesses, especially the UK automotive sector, which continue to face considerable headwinds.

“As the industry grapples with challenges from local and global legislative changes and shifting consumer demands, this rate cut offers a timely boost for investment and consumer confidence. As we look toward 2025, it's clear that measures like this will be essential in helping the industry navigate ongoing economic pressures and position itself for sustainable growth.”

Monetary policy has been guided by the need to squeeze remaining inflationary pressures out of the economy to achieve the 2% target both in a timely manner and on a lasting basis, it added. 

CPI inflation is projected to fall back to around the 2% target in the medium term, conditioned on the usual 15-day average of forward interest rates, as a margin of slack emerges later in the forecast period that acts against second-round effects in domestic prices and wages, explained the Bank.

The combined effects of the measures announced in Autumn Budget 2024 are provisionally expected to boost the level of GDP by around 0.75% at their peak in a year’s time, relative to the August projections. 

The Budget is provisionally expected to boost CPI inflation by just under half of a percentage point at the peak, reflecting both the indirect effects of the smaller margin of excess supply and direct impacts from the Budget measures.

Julian Jessop, economics fellow at the free market think tank the Institute of Economic Affairs, said: “The Bank of England was right to cut interest rates again today but should move further and faster.

“Rates are still higher than necessary to keep bearing down on inflation, especially when the Bank is continuing to tighten policy by running down its holdings of Government bonds.”

He added: “The additional uncertainty and market volatility triggered by the Budget and Trump’s victory had prompted some to speculate that the MPC might hold off today. Delivering the rate cut that almost all had expected should therefore help to reassure households, businesses, and investors.

“The Bank has also endorsed the OBR view that the additional spending and borrowing in the Budget will provide a temporary boost to growth and inflation. This could slow the pace of rate cuts in future, though the Bank stuck to its guidance that rates will fall ‘gradually’ (perhaps a quarter point every three months, taking the Bank rate to 3.75% by the end of next year).”

However, Jessop arges that the Bank’s forecasts are based on assumptions about the path of market interest rates which already look too optimistic. “The increases in taxes and other business costs in the Budget, compounded by the hit to confidence, should also limit any upsides to growth or inflation,” he said.

“The Bank acknowledged the uncertainties here, implying rates could still be cut more quickly. But there is a clear risk that the MPC is too slow to respond.”

The BoE says that there remains “significant uncertainty” around the outlook for the labour market. 

Data is difficult to interpret and wage growth has been more elevated than usual relationships would predict, it explained. 

“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.”

The Committee says it continues to monitor closely the risks of inflation persistence and will decide the appropriate degree of monetary policy restrictiveness at each meeting.

The Bank left UK interest rates unchanged at 5% when it last reviewed them in September, warning that cutting too fast or too much could negatively impact inflation.

The Bank cut the interest rate to 5% in August, the first rate cut since 2020. 

The base rate is closely followed as it heavily influences the rates set by High Street banks and money lenders as well as impacting vehicle lease rentals.

The Bank had held rates at a 16-year high of 5.25% since August 2023, as it attempted to tackle rising prices across the UK.

The MPC’s next meeting is scheduled for December.