Interest rates cut but Bank hints fewer falls to come

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UK interest rates could take longer to fall further after the Bank of England forecast that inflation will creep higher after last week's Budget.

It said while the extra spending will initially boost economic growth and cut unemployment, measures such as raising the cap on bus fares and VAT on private school fees will push prices up at a faster rate.

The Bank cut interest rates to 4.75% from 5% in a move that had been widely expected.

Bank governor Andrew Bailey said rates were likely to "continue to fall gradually from here”, but cautioned they could not be cut "too quickly or by too much”.

Investors now do not expect any further rate cuts this year with the Bank likely to hold rates at its next meeting in December.

Inflation – which measures the pace of price rises – fell below the Bank’s 2% target in the year to September, but was always expected to rise again after gas and electricity prices rose last month.

It was then forecast to drop back to 2% by 2026, but the Bank now expects that to happen in the following year.

The Bank's rate setting body - the Monetary Policy Committee - voted 8-1 in favour of the cut.

Catherine Mann voted to keep rates on hold citing the impact of the Budget on inflation as one of the reasons.

"The Bank of England has delivered one more cut for the road, before it’s widely expected to shut up shop for a while and wait for the dust to settle," said Sarah Coles, head of personal finance at Hargreaves Lansdown.

"More borrowing in the Budget, a higher national living wage and rises in employer National Insurance contributions, have raised concerns that inflation could make an unwelcome return," she added.

Given this, the Bank is "wary of cutting rates further", Ms Coles said.

The slower pace of rate cuts "means better news for savers and those searching for an annuity, but bad news for mortgage borrowers”.

The Bank's interest rate heavily influences the rates High Street banks and other money lenders charge customers for loans, as well as credit cards.

More than one million mortgage borrowers on tracker and variable deals are likely to see an immediate fall in their monthly repayments.

However, mortgage rates are still much higher than they have been for much of the past decade.

The average two-year fixed mortgage rate is 5.4%, according to financial information company Moneyfacts. A five-year deal has an average rate of 5.11%.

The latest rate cut means savers are likely see a reduction in the returns offered by banks and building societies. The current average rate for an easy access account is about 3% a year.

Claire Hopwood and Gavin Laking

Claire Hopwood and Gavin Laking have been consistently using their savings accounts while they get ready to buy their new house.

Gavin says it’s frustrating how quickly interest rate cuts can hit their savings.

“We’ve been enjoying a 4.5% rate on one of our accounts but that’s now dropped to 3.9%."

Claire says the higher interest rates have been helpful: “It’s cover for emergencies. That’s all you can do, really.”

Last week's Budget included plans to borrow an additional £28bn a year, as well as £40bn in tax-raising measures.

The biggest measure is an increase in National Insurance Contributions paid by employers.

Businesses are expected to pass on the cost of higher National Insurance costs to customers by raising prices.

It could also result in a slower pace of wage rises for employees.

The Bank also revised up its growth forecast for 2025 and suggested that the rate of unemployment could fall sharply to 4.1% from 4.7%.

There is a guide to different savings accounts, and what to think about on the government-backed, independent MoneyHelper website.

What are interest rates? A quick guide.