The Bank of England has officially reduced its base interest rate from 5 percent to 4.75 percent, a decision made by the Monetary Policy Committee with a notable majority of eight to one. This move is aimed at alleviating the inflationary burden faced by both households and businesses. The central bank’s statement underscores the ongoing progress in disinflation, indicating that while external inflationary shocks are subsiding, domestic pressures are taking longer to resolve.
Officials at the bank highlighted that monetary policy must remain tight for an extended period until the inflation risks are sufficiently mitigated. The need to extract remaining inflationary pressures is crucial for achieving the target inflation rate of 2 percent sustainably and in a timely manner.
Data shows that the consumer price index inflation decreased to 1.7 percent in September but is projected to rise to approximately 2.5 percent by year-end as the influence of declining energy prices wanes. Meanwhile, services inflation has also receded to 4.9 percent. Average weekly earnings growth in the private sector has seen a decrease, settling at a robust 4.8 percent over the three months ending in August.
As for economic growth, the Bank of England anticipates a return to a more sluggish pace, projecting a growth rate of around 0.25 percent per quarter for the latter half of the year. The labor market remains relatively tight, despite indications of looseness according to historical metrics.
Looking ahead, the central bank expects an additional £70 billion of expenditure, supported by increased taxes and borrowing, to influence inflation, potentially adding 0.5 percentage points to headline figures and 0.75 percent to GDP.
Forecasts indicate that inflation may peak at roughly 2.75 percent midway through next year and remain above the target until 2026 before falling back in 2027—extending the timeline by a year compared to earlier predictions. The Bank of England maintains that a restrictive monetary policy will be necessary until inflation risks are adequately addressed.
