UK borrowing costs are set to be cut for the second time this year, despite tax changes and a Donald Trump victory in the US casting uncertainty over the future path of interest rates.
Most economists think policymakers at the Bank of England will opt to reduce interest rates to 4.75% on Thursday.
Rates currently sit at 5% after being cut by 0.25 percentage points in August, the first reduction since 2020, then kept the same in September.
Since then, the latest official data showed UK Consumer Prices Index (CPI) inflation fell to 1.7% in September, the lowest level since April 2021.
The slowdown, from 2.2% in August, was driven by a sharp slump in petrol prices and lower airfares.
Experts said inflation falling below the Bank’s 2% target level will encourage policymakers to continue easing interest rates, releasing some more pressure on borrowers and mortgage holders across the UK.
Ross Boyd, founder and director of Belfast-based chartered accountancy, RBCA, said: “With inflation under 2% in September and trending down, it seems likely the MPC will only reduce base rate by 0.25% to 4.75%.
“We need to remember that this cautious approach is because future is now looking much more volatile than earlier in the year. Trump has won in the US, and in the UK, the economy and markets feel burdened by the weight of Labour’s budget.
“Will there by growth beyond forecasts? Will the reforms that are planned improve things? These are big questions, and a betting man is likely to say no.
“It looks like a new period of uncertainty – and although it’s likely base rates will come down tomorrow, they may not again until there is more clarity.”
Andrew Goodwin, chief UK economist for Oxford Economics, said the outcome of the Bank’s Monetary Policy Committee (MPC) meeting “looks virtually certain”, although some members could still opt for rates to be kept the same.
MPC members Huw Pill and Megan Greene are the most “unpredictable”, he said, with lingering concerns over services sector inflation and wage growth.
The Monetary Policy Committee meets in the week after Chancellor Rachel Reeves announced almost £70 billion of extra annual spending, funded by business-focused tax hikes and additional borrowing.
The Office for Budget Responsibility (OBR) said the sharp increase in spending will contribute to higher inflation, although it will also help drive stronger economic growth.
Inflation is forecast to average 2.5% this year and 2.6% next year before coming down, assuming “the Bank of England responds” to help bring it to the target rate, the OBR said.
It has prompted economists to reel in predictions for a rapid succession of rate cuts over the next year.
