UK interest rates have been cut for the second time this year, with the Bank of England forecasting a “gradual” reduction in borrowing costs despite the uncertainty following the autumn budget.

The Bank’s Monetary Policy Committee (MPC) on Thursday announced a rate cut from 5% to 4.75%.

Governor Andrew Bailey said UK inflation falling below his 2% target meant policymakers had been able to cut rates to the lowest level since June last year.

“We need to make sure inflation stays close to target, so we don’t cut interest rates too quickly or too sharply,” he said.

“But if the economy develops as we hope, it is likely that interest rates will continue to fall gradually from now on.”

The move is expected to ease some pressure on borrowers who have faced high mortgage and loan costs since rates began rising three years ago.

The MPC said it had reviewed the autumn budget unveiled by Chancellor Rachel Reeves last week, particularly its decision to increase business taxes.

Tax hikes and increased government spending are expected to boost economic growth by 0.75 percentage points, to its highest in a year, compared to previous forecasts released in August.

The budget is also expected to increase consumer price index (CPI) inflation by just under 0.5 percentage points at the end of 2026.

This means inflation will now reach the Bank’s 2% target in the second quarter of 2027, a year later than expected.

There is “significant uncertainty” over the outlook for the jobs market, with businesses expected to face a larger national insurance tax bill and a higher national minimum wage from April, the MPC said .

The impact on inflation “would depend on the degree and speed with which these costs are passed on to prices, wages, employment” or absorbed by profits.

If companies choose to raise prices for consumers, it could put pressure on inflation, according to the MPC analysis.

At the same time, the impact of past interest rate increases continues to drive up borrowing costs for existing mortgage holders.

About 800,000 fixed-rate mortgages with an interest rate of 3% or less are expected to be refinanced on average per year through the end of 2027.

Some landlords have cut spending in anticipation of paying higher rates, the report said.