What does it mean for your personal finances?
Mortgage holders – especially those due to refix – are desperately hoping for interest rates to fall further. Savers may be less keen, although they will be pleased to see a lower rate of inflation.
Let’s take a closer look at the implications policy can have on your back pocket.
Back-to-back cuts in November and December now look less likely
“After Thursday’s meeting, we don’t expect fireworks anytime soon with the MPC settling into a quarterly cutting cycle, with the next cut expected in February,” Matthews says.
Longer term, he says that markets have already tempered their expectations and are now forecasting two or three cuts in 2025, down from previous projections of four of five.
How many MPC meetings are left in 2024?
There are only two MPC meetings left this year – tomorrow and 19 December. Before the Autumn Budget, markets were set on a November rate cut with some experts saying they thought a consecutive cut would follow in December. Is a December cut now out of the question?
Will those hoping for a pre-Christmas rate cut be disappointed?
A close decision?
“Following the recent upheaval in bond markets after last week's Budget, we expect a close 5-4 vote in favour of a 25 basis point cut at Thursday’s MPC meeting,” says Steve Matthews, liquidity investment director at Canada Life Asset Management.
“Since the last meeting in September, when rates were held, economic growth and inflation data have softened, though not enough to shift the MPC’s current cautious approach.”
How much harm can a little red box do?
The independent Office for Budget Responsibility (OBR) said it expects Budget policy measures to “increase inflation by 0.4 percentage points at their peak effect in 2026”.
Meanwhile, economists at consultancy Capital Economics have adjusted their forecasts upwards by 0.2% and 0.1% in 2025 and 2026 respectively.
“The Budget won’t reignite inflation. But it will keep it a little hotter for a little longer than previously looked likely,” chief UK economist Paul Dales told MoneyWeek.
Not exactly an inflation genie, but the little red box could still give the Bank of England pause for thought.
Enter the Budget
Since then, the Autumn Budget has created a bit of a hiccup. Some of the measures announced by chancellor Rachel Reeves are likely to prove inflationary.
Reeves announced plans to increase government spending by £70bn annually – an attempt to avoid cuts to public services and to fund investment projects.
She also unveiled £40bn in tax hikes, with a large part of this being funded by an increase in employer National Insurance contributions. The concern is that businesses will pass this cost on to consumers by putting their prices up.
Plans to increase the National Living Wage by 6.7% from April could also contribute to inflation by keeping wage growth high.
Time for some aggression?
Everything was shaping up nicely for a November rate cut, particularly in light of comments made by the governor of the Bank of England last month. Andrew Bailey told The Guardian that UK policymakers could become a “bit more aggressive” with rate cuts if inflation continues to cool.
Governor of the Bank of England, Andrew Bailey
What about the services sector?
More significantly, services inflation also slowed from 5.6% to 4.9% in September, coming in comfortably below the Bank of England’s 5.5% forecast.
The MPC has been watching this figure closely, as the services sector accounts for around 80% of UK economic output. Services inflation has been particularly sticky in previous reports, suggesting an ongoing problem with inflationary pressures in the domestic economy.
Inflation below target in September
September’s inflation report moved the dial in favour of a November rate cut. The Consumer Prices Index (CPI) came in at 1.7% on an annual basis in September. This was the slowest rate of inflation in over three years, coming in below the Bank of England’s 2% target.
It is worth remembering that prices were rising by around 11% when inflation peaked a couple of years ago. We have made significant progress from that point.
The largest downward contribution to the monthly change in CPI in September came from the transport sector. Air fares fell by 34.8%. Petrol and diesel prices also fell by 5.5p and 6p per litre respectively.
Will the MPC cut rates tomorrow?
Markets are confident that rates will be cut by 25 basis points tomorrow, taking the base rate to 4.75%. But we won’t know for sure until the announcement is made.
When the MPC last met in September, the committee voted to hold rates by a decisive 8-1 majority. Have there been enough economic developments over the past seven weeks to persuade four members to change their vote? Let’s take a closer look.
Good Wednesday morning, it’s Katie Williams and Ruth Emery here reporting from MoneyWeek’s live blog. Interest rate day is almost upon us. At midday tomorrow, the MPC will announce whether it has decided to cut rates or keep them on ice at 5%.
Stay with us as we bring you the latest forecasts in the lead-up to the announcement. We’ll also be analysing what each result could mean for your personal finances.