Interest rate cut comes with inflation warning

Mortgage borrowers were put on notice that interest rates would take longer to come down yesterday when the Bank of England warned that Rachel Reeves's budget would add to inflation while boosting economic growth.

- Richard Partington

Giving its verdict on last week's budget as it announced a quarter-point cut in interest rates to 4.75%, the central bank said the chancellor's plans would drive up inflation to a fresh peak next year.

The monetary policy committee (MPC) voted by a majority of eight to one to reduce rates for the second time this year to ease the pressure on households and businesses from high borrowing costs.

However, it said Reeves's £70bn of additional spending backed by higher taxes and borrowing would add about 0.5 percentage points to headline inflation by the middle of next year and 0.75% to gross domestic product.

Updating its forecasts after taking budget measures into account, the Bank said that it expected inflation to now peak at 2.75% by the middle of next year and then remain above the 2% target in 2026, until falling back in 2027-a year longer than it had expected in its previous forecasts, published in August.