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BOE Delivers Rate Cut With Warning on Budget's Inflation Hit

AInvestThursday, Nov 7, 2024 7:48 am ET
2min read
The Bank of England (BOE) delivered a widely expected 25 basis point interest rate cut on November 7, 2024, bringing the key rate to 4.75%. However, the central bank also issued a cautionary note, warning that the government's tax-and-spend budget could reintroduce inflationary pressures, potentially offsetting the benefits of the rate cut. This article explores the implications of the BOE's decision, the potential impact on consumer spending and economic growth, and the market sentiment surrounding the government's fiscal policies.

The BOE's rate cut is expected to provide some relief to households and businesses, as lower borrowing costs make credit more affordable. However, the central bank's warning about the budget's inflationary impact suggests that the government's fiscal policies could reintroduce inflationary pressures, potentially slowing economic growth. The BOE's decision comes as the UK grapples with a cost-of-living crisis, with inflation having fallen to 1.7% in September.

The BOE's cautious approach to future rate cuts signals a slow pace of easing, aligning with the central bank's commitment to maintaining inflation at 2% and managing risks. This approach may temper market expectations for rate cuts, potentially leading to higher borrowing costs for longer. Mortgage borrowers, for instance, face the prospect of higher rates despite the BOE's cut.


The BOE's warning about the budget's inflationary impact could dampen market sentiment, as investors may perceive higher inflation as eroding purchasing power and reducing corporate earnings. This could lead to a sell-off in equities and a flight to safe-haven assets like government bonds. However, the BOE's rate cut may also provide some relief, as lower borrowing costs can stimulate economic growth and boost corporate profits. The key will be how investors balance these competing forces and adjust their portfolios accordingly.

The BOE's decision comes as the Federal Reserve also prepares to cut rates, with a 75% chance of a 25 basis point cut priced in. The BOE's move aligns with a slow-to-start bandwagon of easing across advanced economies, possibly soon to be joined by the US Federal Reserve after Chair Jerome Powell signaled that officials are on course to cut rates in September unless inflation progress stalls.


The government's tax hikes and increased public spending, as outlined in the budget, could have significant implications for inflation expectations and market sentiment. The BOE's warning highlights the potential risks to inflation expectations and market sentiment from the government's fiscal policies. Investors should consider these risks when making investment decisions, as the budget's inflationary effects could have far-reaching consequences for the UK economy and investment landscape.

In conclusion, the BOE's rate cut, coupled with its warning about the budget's inflationary impact, underscores the complex interplay between fiscal and monetary policy. The central bank's decision to lower interest rates by 25 basis points reflects a cautious approach to supporting economic growth while managing inflationary pressures. The BOE's concern over the government's tax-and-spend budget, which includes £40 billion in tax hikes, raises questions about the sustainability of the government's fiscal policies and the potential for a widening fiscal deficit. Investors should consider these long-term implications when making investment decisions, as the budget's inflationary effects could have significant consequences for the UK economy and investment landscape.
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