The Bank of England cut interest rates by 25 basis points as expected, warning that the budget will drive up inflation

According to Zhitong Finance APP, the Bank of England has cut interest rates for the second time this year, but did not indicate a faster pace of easing, instead warning that the budget could push inflation up by as much as 0.5 percentage points.

The eight members of the Bank of England's Monetary Policy Committee voted to lower the benchmark interest rate by 25 basis points to 4.75%. Catherine Mann was the only dissenting member, preferring to keep rates at 5%. This outcome aligns with the general expectations of economists.

Bank of England Governor Andrew Bailey stated on Thursday, "We need to ensure that inflation is close to the target level, so we cannot lower rates too quickly or too much. However, if the economy develops as we expect, rates are likely to gradually decline from now on."

Following the interest rate decision, the British pound rose slightly, while two-year UK government bonds continued to rise. Traders have fully priced in two more rate cuts by the end of next year, each by 25 basis points.

Chancellor of the Exchequer Rachel Reeves' budget proposal on October 30 and Donald Trump's election as President of the United States have complicated the Bank of England's path to further easing monetary policy. The UK now plans to spend £70 billion ($90.4 billion) annually, nearly half of which will be financed through borrowing. Trump has threatened to raise tariffs in a new global trade war.

The market currently expects UK interest rates to remain high, which means consumer price growth will further slow, and the Bank of England may take more action.

Even so, the Bank of England's committee has retained its guidance that "gradually removing policy restrictions remains appropriate based on evolving evidence."

Bank of England policymakers estimate that Reeves' budget will raise the inflation rate by 0.5 percentage points compared to the August forecast, peaking at 2.8% in the third quarter of 2025.

Policymakers at the Bank of England voted after the results of the U.S. election became clear on Wednesday, but they only mentioned the risks of a trade war in limited terms.

The minutes of the meeting noted, "Increased trade divergence and adverse geopolitical developments (including events in the Middle East) will pose upside risks to commodity and raw material prices."

Reeves' budget has further triggered uncertainty. The Bank of England believes that the UK’s minimum wage will increase by 6.7% starting in April next year, and employers' national insurance contributions will rise by £26 billion, which will impact wages, profit margins, and employment.

Officials will closely monitor the extent to which profit margins are squeezed, wages decline, and prices rise. The Bank of England added that the recent significant decline in service sector inflation "is expected to ease somewhat." It also noted that the labor market "remains loose, although relatively tight by historical standards."