• Bank Rate cut to 4.75% but pace of rate cuts expected to moderate in wake of Budget
• Mortgage market activity continues to show signs of recovery
• Households continue to save in September, but this may reduce as Bank Rate falls
   

Bank Rate cut to 4.75% and increase growth forecasts for 2025

1. In a widely expected move, the Bank of England cut the Bank Rate from 5.00% to 4.75% in November following CPI inflation falling to a three year low of 1.7% in September. However, the pace at which the Bank is expected to cut rates has moderated. The latest market interest rate data from 8 November shows a significant shift in expectations compared to three weeks ago. Bank rate is now expected to be 40 to 50 basis points higher in one year and three years time – at 4.07% in 1 years, up from 3.57% three weeks ago, and 3.83% in 3 years, up from 3.45% three weeks ago.
    
2. Whilst it is most likely that the direction of the Bank rate will be downwards, the rate at which it reduces is less clear following the Budget and other global political events. The Bank’s Chief Economist has also warned that the path of interest rates could be derailed by significant economic disturbances, of which there are many sources.

3. In the minutes to the November MPC meeting, the Bank says that a gradual approach to removing policy restraint remained appropriate, but if the economy evolves as expected, the Bank rate should continue to fall gradually from here. Whilst this messaging is similar to the messaging in August, it appears the committee are perhaps taking a more cautious approach to monetary easing and has moved away from the “more aggressive” stance suggested by the Governor just a few weeks ago.
    
4. This more cautious approach will have been influenced by the recent Budget. As detailed in the November Monetary Policy Report the proposed increased government spending means spare capacity in the economy will emerge in 2025 rather than this year. Both the Bank and OBR expect the Budget measures to boost GDP growth by 0.75 percentage points next year and increase CPI inflation by just under 0.5 percentage points at its peak. The Bank now expects CPI inflation to be 2.4% by the end of the year which is lower than their forecast in August of 2.7%. However, inflation is forecast to be 2.7% in 2025 and 2.2% in 2026, which is higher than forecast in August. Inflation is then expected to fall below target at 1.8% in 2027.
    
5. The increase in employer National Insurance Contributions (NICs) announced in the Budget is expected to have a small upwards impact on companies’ prices and have a small downward effect on wages. The increase 6.7% increase to the National Living Wage in 2025 is expected to have an upwards effect on wages. The overall impact of these measures will depend on how firms respond and how it transmits into prices and wages.
6. Overall, the Bank expect labour market conditions to ease over the next three years as measured by the vacancies to unemployment ratio. The unemployment rate for June to August 2024 was 4.0% and is expected to increase to 4.2% by the end of the year and remain broadly unchanged in 2025 before increasing to 4.3% in 2026 and 4.4% in 2027. At the same time the estimated number of job vacancies in July to September fell for the 29^th consecutive period to 841,000, but the pace of this decline has slowed somewhat. Consequently, the vacancies to unemployment ratio has fallen moderately since the start of the year at 1.40 to around its 2019 level of 0.96, and is expected to continue falling, although it remains elevated compared to its long run average.
    
7. Wage growth (total pay) softened to 3.8% in the three months to August, down from 4.1% in the three months to July and down from a peak of 7.3% in the summer of 2023. In real (CPI adjusted) terms wages have grown by 2.6%.
    
8. Household consumption makes up the largest part of demand in the economy and is a key determinant on how GDP growth will evolve. Higher interest rates, and therefore a higher incentive to save has resulted in weaker consumption and higher savings. The Bank says the saving ratio has been higher than expected at around 10% recently. In a recent Bank Survey 7% of households said they had saved more than usual over the past 12 months and that higher interest on savings was a key driver, with this share rising to 11% for those on the highest incomes. This saving ratio is expected to fall to around 8.25% by the end of 2026 as interest rates fall. However the Bank says there are large uncertainties around this, and it could remain elevated if precautionary savings become a more important factor for households given recent shocks such as covid and rising energy prices. The ratio could also fall back more quickly than expected if households decide to use a build-up of savings over the covid period to fund purchases. 
    

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