The Bank of England predicts that Rachel Reeves’ first budget as chancellor will increase inflation by up to half a percentage point over the next two years, contributing to a slower fall in interest rates than We didn’t think so before.

Announcing a widely expected 0.25 percentage point reduction in the base rate to 4.75%, the Bank’s Monetary Policy Committee (MPC) forecasts that inflation will return “sustainably” to its objective of 2% in the first half of 2027, a year later than at its last meeting.

“Since the previous MPC meeting, the path implied by the market for the Bank in the United Kingdom has increased significantly,” the MPC said in its minutes.

Lower interest rates – latest updates

The Bank’s quarterly monetary policy report revealed that Ms Reeves’ view £70 billion package The tax and borrowing measures will put upward pressure on prices and lead to a three-quarter point increase in GDP next year.

Governor Andrew Bailey stressed, however, that the underlying trend was “continued progress in disinflation.”

The MPC, whose members voted 8-1 in favor of the cut, with only one opponent favoring remaining at 5%, maintained its view that rates should fall “gradually” while monitoring the economic response to the fall in inflation.

“Inflation is just below our 2% target and we were able to cut interest rates again today,” Mr Bailey said.

“We need to make sure inflation stays close to target, so we don’t cut interest rates too quickly or too sharply. But if the economy performs as we hope, it’s likely that rates interest rates will continue to decline gradually from now on.”

Why will inflation increase?

The Bank predicts that upward pressure on prices will begin in the first half of next year, with the addition of VAT on private school tuition fees and the £1 increase in the price of tuition. bus fare cap at £3.

THE increase in national insurance for employers at 15%, the most important measure in the budget, is “expected to have a slight upward impact on inflation”, offset by the freezing of customs duty rates on fuels.

Together, these factors will push inflation up by 0.3 percentage points next year, with the peak of almost half a point not being reached until 2026 after the freeze on tariffs on goods is lifted. fuels, a measure which the Bank is forced to assume will happen, despite successive chancellors, notably Ms. Reevesmaintaining it for 11 years.

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The Bank found that the increase in national insurance and the increase in the national living wage “are likely to increase overall employment costs” and will be passed on to employers through a combination of higher prices, marginal costs and wages, but the rest between these is not yet clear.

“The combined effects of the measures announced in the 2024 autumn budget are provisionally expected to increase the level of GDP by around three-quarters percent to its maximum in a year’s time, compared to the August projections,” the minutes said.

“The budget is tentatively expected to increase CPI inflation by just under half a percentage point at the peak, reflecting both the indirect effects of the smaller margin of excess supply and the direct impacts of budgetary measures.”