Money Blog: Interest rate cut to 4.75%, but Bank of England says Budget will be inflationary | Money news

Rachel Reeves probably doesn’t need a reminder about the political and economic power of inflation.

Her party’s stunning election victory over the summer was largely down to the cost of living crisis.

Donald Trump’s triumph this week underscored that point: His sharp rise across all demographic groups is due to the inflationary impact that the Biden administration failed to contain by Election Day.

In this context, the Bank of England’s decision that its first budget is inflationary could further undermine confidence in its first fiscal intervention.

A half-point increase in peak inflation, a one-year extension of the return to a sustainable 2% rate and slower-than-expected rate cuts all flow from its red box, the Bank forecasts.

Their forecast also points to a three-quarter point increase in the growth rate, and all of these forecasts are broadly in line with those already outlined by the Office for Budget Responsibility.

What the budget does not do is change the overall picture of inflation as seen by the nine members of the Monetary Policy Committee and the governor, for whom political neutrality is a given.

Disinflation is the predominant trend, and while some effects remain, leading to today’s decline, the trend in prices and rates is down.

“Progress in deflation continues, particularly after previous external shocks have subsided, although remaining domestic inflationary pressures are being resolved more slowly,” the MPC said.

What’s striking is that when it comes to future rate cuts, the language is identical to that used after his last meeting, which kept rates at 5%.

“Given new evidence, a gradual approach to removing policy restrictions remains appropriate,” it said.

This means consumers should expect rates to decrease over time. Rachel Reeves will hope they’re right.