The Bank of England has cut rates for the second time this year, but warned of inflation risks due to government spending.

The Bank of England has cut the interest rate by 25 basis points to 4.75%, marking the second reduction this year. This move was widely anticipated among economists, but the central bank warned that the recent government budget could lead to a half-percentage point increase in inflation.

This is mentioned in a statement from the central bank.

Eight members of the Monetary Policy Committee, led by Chair Andrew Bailey, voted for the rate cut. However, external policy representative Catherine Mann opposed it, preferring to keep the rate at 5%.

In his statement, Bailey said that the Bank of England needs to "ensure that inflation remains close to the target level, so we cannot lower interest rates too quickly or too significantly." However, he added that, "if the economy develops as we expect, it is quite likely that interest rates will continue to gradually decrease."

The Bank of England's path to further easing has been complicated by two key factors:

1. A £70 billion annual spending plan announced in Chancellor Rachel Reeves' budget on October 30, nearly half of which is funded through borrowing.

2. The election of Donald Trump as President of the United States, who threatens tariff hikes and a new global trade war.

According to estimates from the Bank of England, Reeves' budget will result in a 0.5 percentage point increase in inflation compared to the previous forecast, peaking at 2.8% in Q3 2025. The central bank also pointed to risks of rising prices for goods and raw materials due to increased trade fragmentation and geopolitical events.

Despite the rate cut, the Bank of England emphasized that "a gradual approach to unwinding restrictions remains appropriate." This indicates that the central bank may be cautious about further easing as it balances inflationary risks from fiscal stimulus with the need to support the economy.

This move by the Bank of England precedes the anticipated 25 basis point rate cut by the U.S. Federal Reserve later on Thursday, which will be the first policy decision following Trump's election victory. Meanwhile, the Swedish Riksbank intensified easing by lowering its rate by 50 basis points, while Norway kept its rates unchanged.

Background. Earlier, Mind prepared a piece titled “Central banks around the world no longer follow the Fed. What happened and what did the U.S. do to deserve this?”