Bank of England delivers expected rate cut but remains downbeat compared with the OBR, suggesting bad news to come for the Chancellor

The Bank of England’s Monetary Policy Committee delivered a widely expected rate cut, but more significant was the updated forecasts showing the Bank remains downbeat about medium-term growth, suggesting Rachel Reeves will have to raise taxes to keep to her fiscal rules, the Resolution Foundation said today (Thursday).

While other major central banks have put rates on hold over the summer, the Bank of England cut rates by 0.25 percentage points, the fifth reduction since the Bank started cutting rates a year ago. Bank Rate is now at 4 per cent, its lowest level since March 2023.

Mortgagors will welcome today’s rate cut, but many families are set to see repayments rise over the next year. Around 625,000 households coming off two-year fixed deals in the next 12 months can expect lower rates on renewal, but around 700,000 households face rises over the next year, as they roll off low five-year fixes agreed in 2020 and 2021.

But there was bad news for the Chancellor: while the Bank of England’s growth forecasts were little changed, they remain more pessimistic than those made by the Office for Budget Responsibility (OBR) in the medium term. For example, the Bank is expecting growth of just 1.2 per cent in 2026 compared to an OBR forecast of 1.9 per cent. If the OBR brings its forecast closer to that made by the Bank of England, it is likely that the Chancellor will face a significant shortfall against her fiscal rules at the Autumn Budget.

And, elsewhere, there was little in the Bank’s forecasts to bring cheer to struggling families. The Bank is forecasting higher inflation in the coming months with CPI now expected to peak at 4 per cent in September, rather than the 3.7 per cent that was expected at the time of the May Report, with much of that coming from higher food-price inflation. Real wage growth is also expected to slow sharply from around 3.8 per cent in 2024 to just 0.5 per cent this year.

James Smith, Research Director at the Resolution Foundation, said:

“There was bad news for the Chancellor from the Bank of England today as its forecasts remain more pessimistic on growth than the Office for Budget Responsibility, suggesting bad news is coming at the Autumn Budget.

“Bank Rate is now 4 per cent – its lowest level since March 2023. While this will be broadly welcomed by mortgagors, around 700,000 families will still see repayments rise as they come off five-year fixed-rate deals.

“The was also bad news from the Bank of England for families struggling with the cost of living: inflation is set to be higher than previously expected, with food inflation rising further in the coming months, and real wage growth set to hit a brick wall this year.”