Bank of England rate cut no surprise, but where do we go from here?

At a glance

• The Bank of England (BoE) has cut interest rates by 0.25% to 4.75%.
• The base rate is one of the BoE’s most important tools in keeping inflation “low and stable”. 
• The decision was not a huge surprise. Recent inflation data made the rate cut likely.
  

What happened today, and what was the market reaction?

The Bank of England (BoE) delivered an interest rate cut of 0.25% today, as was widely expected by investors. 

Ahead of the announcement, the market probability of the policy rate change had climbed to 98%. Indeed, there was little resistance to the rate cut decision within the Monetary Policy Committee, which delivered the reduction with a majority vote of 8 to 1.

Inflation has continued to drop over the past few months and recently fell to below the Bank's target rate in the year to September. The Consumer Prices Index dropped from 2.2% to 1.7%, a steep decline which takes the inflation measure to its lowest point since 2021.

The BoE statement, released alongside its decision, said that the Bank expects the changes revealed in the Autumn Budget should increase GDP by 0.75% in a year's time and should also increase inflation by 0.5%. As such, this could be described as a so-called "hawkish cut" as interest rates are usually reduced to combat falling inflation. 

What does our investment team think could happen next?

The Nutmeg Investment Team believes a more uncertain backdrop generally means the BoE may exhibit more caution in its next few meetings. 

James McManus, Chief Investment Officer at Nutmeg, explains that inflation data meant this cut was all but certain, but the Autumn Budget - amongst other factors - may call the pace of rate cuts from this point into question.

"With inflation falling, the Bank of England's Monetary Policy Committee has cut interest rates by 0.25% to 4.75%. This decision was expected by the market, but the timeline for future cuts may have changed significantly over the past fortnight.

"The significant increases to government spending set out in the Budget as well as a rise in wages, underpinned the Office for Budget Responsibility's forecast for elevated inflation next year. It means a further cut before Christmas is now uncertain and markets expect only two more cuts of 25 basis points by September 2025, down from three at the previous meeting in September. We expect the bank will remain data-dependent, but recent events will likely make policymakers think twice about the cadence of the rate cutting cycle.”

You can find out more about inflation, interest rates and how they affect investments in this article.

If you need information on your investments at this time, you can book a free call with one of our experts to discuss your options. 

Risk warning:

As with all investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you invest. Past performance and forecasts are not a reliable indicator of future performance.