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UK interest rates could take longer to fall after the Bank of England forecast that inflation will creep higher after last week’s Budget.
It said while the extra spending will initially boost economic growth and cut unemployment, measures such as raising the cap on bus fares and VAT on private school fees will push prices up at a faster rate.
The Bank cut interest rates to 4.7% from 5% in a move than had been widely expected.
Bank governor Andrew Bailey said rates were likely to “continue to fall gradually from here”, but cautioned they could not be cut “too quickly or by too much”.
Investors now do not expect any further rate cuts this year with the Bank likely to hold rates at its meeting in December.
Inflation – which measures the pace of price rises – fell below the Bank’s 2% target in the year to September, but was always expected to rise again after gas and electricity prices rose last month.
It was then forecast to drop back to 2% by 2026, but the Bank now expects that to happen in the following year.
The Bank’s interest rate heavily influences the rates High Street banks and other money lenders charge customers for loans, as well as credit cards.
More than one million mortgage borrowers on tracker and variable deals are likely to see an immediate fall in their monthly repayments.
However, mortgage rates are still much higher than they have been for much of the past decade.
The average two-year fixed mortgage rate is 5.4%, according to financial information company Moneyfacts. A five-year deal has an average rate of 5.11%.
The latest rate cut means savers are likely see a reduction in the returns offered by banks and building societies. The current average rate for an easy access account is about 3% a year.
Chancellor Rachel Reeves, said: “Today’s interest rate cut will be welcome news for millions of families, but I am under no illusion about the scale of the challenge facing households after the previous government’s mini-budget.”
The timing and extent of rate cuts could be affected by the extra growth and inflation which arises from last week’s Budget.
Last week, the Labour government’s Budget included plans to borrow an average of £28bn a year, as well as £40bn in tax-raising measures.
The biggest measure is an increase in National Insurance Contributions paid by employers.
The Bank said that this would have a small impact on inflation. Businesses are expected to pass on the cost of higher National Insurance costs to customers by raising prices.
It could also result in a slower pace of wage rises for employees.
The Bank also revised up its growth forecast for 2025 and suggested that the rate of unemployment could fall sharply to 4.1% from 4.7%.
