Bank of England Cuts Interest Rates, Foresees Gradual Future Reductions

The Bank of England announced today a reduction in interest rates. This marks only the second reduction since 2020. In a press conference following the decision, Governor Andrew Bailey shared the bank's views on inflation, growth, and the effects of the new government's budget on economic policy.

Bailey highlighted the anticipated positive impact of the budget announced on October 30 on the UK's gross domestic product (GDP), stating that they expect a quarterly increase of about three percent at its peak within a year. This increase is projected to stem from a stronger and more immediate rise in government consumption and investment, significantly offsetting the impact of high taxes on growth.

Despite the anticipated fiscal tightening over the period, the measures introduced in the budget are expected to reduce the economy's idle capacity. Bailey emphasized that changes in fiscal policy should not significantly alter the trajectory of interest rates. He noted the necessity for continued declines in service price inflation to maintain the consumer price inflation target at 2%.

The labor market continues to be a critical factor for the Bank of England in measuring inflationary pressures. Acknowledging mixed signals from the data, Bailey indicated that the bank is monitoring a complex situation closely.

The Bank of England's decision to lower interest rates comes with expectations of gradual future reductions. This reflects a cautious approach in light of higher inflation forecasts and anticipated growth following the government's fiscal policy announcements.