UK interest rates cut to 4.75%, as Bank of England warns budget will add to inflation – business live | Business

The Bank of England has calculated that Rachel Reeves’s budget last week will fuel inflation, but also lift the UK’s growth rate.

In its latest Monetary Policy Report, released at noon, the Bank says that measures such as a higher cap of £3 on bus fares, adding VAT on private school fees, and the increase in Vehicle Excise Duty from April, will push up the cost of living measure.

It estimates that the Budget is will boost CPI inflation (which was 1.7% in September) by just under ½ of a percentage point at the peak, “reflecting both the indirect effects of the smaller margin of excess supply and direct impacts from the Budget measures”.

The increase in employer NICs is also assumed to have a small upward impact on inflation.

The Bank explains:

In the near term, the direct effects of the rise in the cap on single bus fares from £2 to £3 and the introduction of VAT on private school fees from January, and the increase in Vehicle Excise Duty from April, push up the MPC’s projection for CPI inflation from 2025 Q1 and Q2.

The measures announced in the autumn budget are also expected to boost the level of GDP by around 0.75% at their peak in a year’s time, relative to the Bank’s August projections.

The Bank of England says it is appropriate to take a “gradual approach to removing policy restraint” – ie, cutting interest rates.

The minutes of this week’s meeting say:

Monetary policy will need to continue to remain restrictive for sufficiently long until the risks to inflation returning sustainably to the 2% target in the medium term have dissipated further.

The Committee continues to monitor closely the risks of inflation persistence and will decide the appropriate degree of monetary policy restrictiveness at each meeting.

Policymakers weren’t quite unanimous in deciding to cut UK interest rates today.

The Bank’s MPC voted by a majority of 8–1 to reduce Bank Rate by 0.25 percentage points, to 4.75%.

One member – the hawkish Catherine Mann – preferred to maintain Bank Rate at 5%, but was outvoted.

The Bank says:

At this meeting, eight members preferred to reduce Bank Rate to 4.75%. There had been continued progress in disinflation, particularly as previous external shocks had abated, although remaining domestic inflationary pressures were resolving more slowly. These members put different probabilities on and risks around the three cases, but they believed that a cut in Bank Rate was appropriate at this meeting. They would continue to assess the range of evidence over time.

One member preferred to maintain Bank Rate at 5%. For this member, structural factors in wage and price-setting dynamics continued to draw out the underlying disinflation process, and CPI inflation was projected to remain above the 2% target until the end of the forecast period.

Wage developments might continue to be more robust than projected as firms and workers incorporated past and upcoming adjustments in the National Living Wage and National Insurance contributions. This, along with prospects for more robust demand associated with the Budget, was likely to support pricing opportunities for firms. In the face of these uncertainties, maintaining the current level of Bank Rate would allow time to evaluate whether these upside pressures would materialise.

Newsflash: The Bank of England has cut UK interest rates for a second time this year.

As City experts had predicted (see opening post), the Bank’s monetary policy committee have voted to lower Bank Rate by a quarter of one percentage points, down from 5% to 4.75%.

It’s the second cut this year, following August’s reduction, and comes after inflation fell below its 2% target in September.

The Bank will have made the decision having assessed last week’s UK government budget and Donald Trump’s election as US president.

European leaders have urged Donald Trump to avoid trade wars, maintain support for Ukraine and to refrain from unsettling the global order, as they arrive in Budapest for a meeting.

Reuters has the details:

“I trust the American society,” European Council chief Charles Michel said as he and others urged Trump to continue to support Ukraine, as they arrived at a meeting of nearly 50 European leaders in Budapest.

“They know it is in their interest to show firmness when we engage with authoritarian regimes. If the United States were weak with Russia, what would it mean for China?”

European Commission chief Ursula von der Leyen said it was now up to the European Union to be united. No EU member state on their own can manage the upcoming challenges, she said.

German government bonds are weakening today, following the collapse of its coalition government last night when Chancellor Olaf Scholz fired finance minister Christian Lindner.

With prices falling, the yield – or rate of return – on 10-year German bunds has risen by around 9 basis points, from 2.396% to 2.483%.

That narrows the gap (slightly) between German and UK debt; 10-year gilts are yielding 4.54% this morning.

Scholz said he had dismissed Lindner after he refused to suspend rules limiting new government borrowing. If that debt brake were lifted, Germany could issue more bonds.

Europe’s economy could see a surge in goods shipments from China if Donald Trump hits Beijing with new tariffs, argues analyst Rory Green of TS Lombard.

Green tells clients that this could lead to a wider proliferation of tariffs:

Beyond China, the impact of restrictions on PRC exports to the US is likely to prove disinflationary initially as Chinese manufacturers redirect sales to other markets.

In the first trade war, Europe was the primary destination and is likely to be so once again. Given the existing market pressure from Chinese competitors globally, we expect this initially deflationary surge in exports to be met with tariffs – not just from Brussels but also from other trade partners.

The proliferation of trade restrictions already under way will accelerate during Trump’s second term and, combined with increased China stimulus, may put upward pressure on global goods inflation.

Turkey is hoping that it could benefit from lower US tariffs under Donald Trump’s next presidency.

Turkey’s trade minister said today that Istanbul expects Trump to lower tariffs on its steel and textile exports.

Trade minister Omer Bolat told broadcaster AHaber:

“We expect that…customs duties will be reduced in our foreign trade, especially in steel and textile products.

Bolat added that Turkey’s defence and financial sectors could also benefit.

The average price of a home in the UK is at a record high but demand could slow as a result of policies in Rachel Reeves’s budget, Britain’s biggest mortgage lender has said.

Halifax’s monthly house price index found that the cost of the average home hit £293,999 in October, the highest ever recorded, outstripping the £293,507 reached in June 2022.

The 0.2% rise in October is the fourth consecutive month of growth, and brought the annual growth rateto 3.9%, from 4.6% in September.

The figures suggest homebuyers shrugged off concerns about what would be contained in the chancellor’s debut budget, delivered at the end of October. However, Halifax said measures included in the speech could affect future demand.

Ukraine’s sovereign dollar bonds are rallying for the second day, up over 2%, as investors wager that Donald Trump’s return to the White House could end the country’s war with Russia.

Reuters has the details:

Longer-dated maturities saw the biggest gains, with the 2035 paper rising by more than 2 cents to nearly 50 cents on the dollar, its highest since the bonds were launched in early September as part of the country’s restructuring.

The country’s GDP warrant – a growth linked fixed income instrument that is still earmarked for restructuring – added 2.6 cents to bid at 76.4 cents, the highest since Russia’s invasion in February 2022, Tradweb data shows.

Trump once boasted he could end the decade-long Russo-Ukrainian war in “24 hours”, and his second presidency could be difficult for Ukraine, at a time when Russia is advancing on the battlefield at the quickest rate since 2022.

Analysts at RBC Capital Markets predict the Bank of England will be split on today’s interest rate decision, with a majority voting for a cut.

RBC explain:

• We expect the Bank of England (BoE) to recommence its cutting cycle at its November meeting and look for the MPC to deliver a 25bp cut in Bank Rate to take it to 4.75%.

• Our best judgement is that the Committee will vote 6-3 split in favour of cutting Bank Rate.

• The Autumn Budget has provided the MPC with perhaps more to think about, particularly as regards the near-term outlook, than was anticipated in advance.

• The plans set out by the Chancellor this week slow the pace of deficit reduction compared to those from March, which the August MPR forecasts was conditioned on, and would be expected to impact the Bank’s near-term forecasts for growth and inflation which will be released alongside the meeting.

• We don’t think the MPC will necessarily adjust its language in the policy statement in response to recent events; key on the day instead will be how the Governor chooses to discuss the impact of the Budget and steer expectations for forthcoming meetings.

Goldman Sachs have cautioned that a trade war could threaten growth in the US stock market.

In a research note on the US election, Goldman say they are sticking with their S&P 500 target of 6,300 points in 12 months time – a 9% gain.

They tell clients:

Robust earnings growth should drive continued equity market appreciation into next year. We forecast EPS growth of 11% in 2025 and 7% in 2026, although those estimates may change as the new administration’s policy agenda comes into clarity.

The prospect of trade conflict poses downside risk to these estimates, while the potential for changing regulatory and corporate tax policy pose upside risks.

After losing ground yesterday, European stock markets are rallying today, despite the political crisis in Germany and worries of a looming trade war with America.

In Berlin the DAX index has risen by 1.25%. Carmakers are recovering some of yesterday’s losses, with BMW up 2.5%.

The pan-European Stoxx 600 is up 0.5%, led by banking stocks – as investors anticipate that interest rates will be higher than previously expected.

There’s drama in the central bank world already this morning!

In Stockholm, the Riksbank has cut Swedish interest rates by half a percentage point, down from 3.25% to 2.75%.

The Riksbank explains that there are “still few clear signs of a recovery”, so it has slashed borrowing costs to support economic activity. It says that if the outlook for economic activity and inflation remains the same, the policy rate may also be cut in December and during the first half of 2025.

The Riksbank adds that it is hard to assess economic developments at present, partly due to the US election, explaining:

There are risks linked to the geopolitical tensions, the economic policy abroad, the krona exchange rate and economic activity in Sweden that can affect the outlook for economic activity and inflation and lead to a different monetary policy stance.

Norway’s central bank has just voted to leave interest rates on hold, though, at 4.5%.

A rate cut in December is not likely either, with Norges Bank governor Ida Wolden Bache saying:

The policy rate will most likely be kept at 4.5 percent to the end of 2024.

After a rollicking surge yesterday, the US dollar is weakening a little this morning.

The dollar is down 0.3% against a basket of other major currencies, while the pound has gained half a cent (-0.35%) to $1.293.

The euro, which tumbled by 1.8% yesterday, has nudged up by 0.35% today to $1.0765, despite the fears of a eurozone recession.

Supermarket chain Sainsbury’s want the UK government to listen to the concerns of British farmers over last week’s budget.

Farmers are very unhappy that Rachel Reeves has cut the inheritance tax relief on agricultural assets.

Some are threatening to go on strike to disrupt food supplies in protest at the plan, under which assets worth more than £1m, which were previously exempt, will be liable to IHT at 20%, half the usual rate.

The government argues that just 28% of farmers will be affected by the new inheritance tax rules, but that is disputed by the farmers’ union.

CEO Simon Roberts also revealed that the increase in national insurance rates for employers in last week’s budget will add £140m to its costs.

Roberts was speaking after Sainsbury’s reported a 4.6% increase in sales, excluding fuel, in the 28 weeks to 14 September 2024. It says growth in food volume sales was “ahead of the market”, helping to lift pre-tax profits by 4.7% to £356m.