91探花

A rate cut from 5% to 4.75% on Thursday looks a sure bet, financial markets have it at a 93% chance. But the recent Autumn Budget, which included a much bigger fiscal expansion than expected, most likely means fewer rate cuts next year. Indeed, financial markets went from pricing in a 62% chance of a December rate cut the day before the budget, to a 28% chance the day after. Four cuts looks like the most we can expect now next year, which would take interest rates to 3.75% by the end of 2025.

All the data since the last Monetary Policy Committee (MPC) meeting in mid-September has moved in the right direction, at least as far as the MPC is concerned.

Headline inflation has plunged to just 1.7% and services inflation has dipped below 5% for the first time since May 2022. What’s more, headline pay growth has dropped below 4% and private sector regular pay growth, the measure most closely tracked by the MPC, fell to 4.8%. In addition, three month on three month GDP growth, which is a good measure of the short-term trend, slipped to just 0.2% in August, business surveys have softened and business and consumer confidence has dropped sharply, reducing the likelihood that an overheating economy keeps inflation sticky.

All that suggests another rate cut next week is warranted and needed.

However, by raising spending by almost £60bn and borrowing by almost £30bn in 2025/26, the budget will materially increase growth and inflation over the next two years. The Office of Budget Responsibility estimates that inflation will rise to 2.6% on average next year, rather than returning to 2%, with 0.5% of that directly due to the budget. That probably means a sequential rate cut in December is off the table now.

It also probably means fewer rate cuts next year. To be clear, there is still room for the MPC to cut rates. After all, at current levels interest rates are very restrictive and inflation will fall well below the 2% target if the MPC doesn’t cut rates at all. But it does make Bank of England Governor, Andrew Baileys’ comments that “the MPC could pursue more aggressive rate cuts if the inflation news continued to be good”, seem out of date. And because demand in the economy will be stronger and inflation higher, it reduces the need for the Bank to rush to get interest rates down.

All told, we expect one further cut this year, at this week’s meeting, and a 25 basis points cut in each quarter of 2025.

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