The shaded area of chart two that's just come up: we expect consumer price inflation to rise somewhat as the drag from lower energy bills wanes. That's the orange bars. And the contribution of services price inflation comes to dominate. That's the yellow bars. It's encouraging that we can now move forward from a lower starting point, but services price inflation remains elevated and recent downside news has tended to be driven by more volatile components such as airfares and accommodation. We still need to see services price inflation come down more broadly to keep headline consumer price inflation at the 2% target.
Monetary policy has been guided by the need to squeeze remaining inflationary pressures out of the economy to achieve the 2% target sustainably. We have needed restrictive monetary policy to lean against domestic second-round effects on those global inflationary shocks. We now face the question of whether the remaining domestic inflationary pressure, for instance manifest in services price inflation and pay growth, will dissipate naturally now that the global shocks initially driving up inflation have unwound, or whether achieving this disinflation will require a period of economic slack in the UK economy. Alternatively, are we experiencing sustained changes in the structure of the economy with longer-lasting effects on inflationary pressures? These have become important cases in the MPC's deliberations. As policymakers, we can think that all three cases are of relevance, albeit to different degrees.
Now, the forecast that we published in the Monetary Policy Report today is based on the second case. In the projection, second-round effects on domestic prices and wages are expected to take somewhat longer to unwind than they did to emerge, but a margin of slack emerging over the forecast period is sufficient to ensure that consumer price inflation falls back to the 2% target in the medium term. And this is shown in chart three. The blue line is the projection for consumer price inflation conditional on the 15-day average of the market-implied path for interest rates to the 29th of October. That's our usual convention. Headline inflation increases to around 2 and 3/4% by the second half of next year before falling back to around the 2% target over the medium term.
Alongside the forecast, the committee has also considered the two alternative cases for how the persistence of inflationary pressures may evolve. In these cases, inflationary pressures may prove to be either less persistent or more persistent than in the projection. And this is set out in more detail in a box in the report. I'm now going to add some reflections on the key judgments that we've made on the outlook for inflation.
Our November projection is conditioned on government policies as announced in the Autumn Budget. Chart four shows public sector net borrowing and how it is projected to change relative to the previous March projection by the Office for Budget Responsibility. In the Autumn Budget, the path for public sector net borrowing is higher than it was in March, but the chart on the left also shows that the difference is more pronounced in the first than in the future years. Public sector net borrowing is still projected to fall significantly over the forecast period.
We provisionally expect the measures announced in the budget to boost the level of GDP by around three-quarters of a percent at their peak in a year's time. This reflects the stronger and relatively front-loaded paths for government consumption and investment more than offsetting the impact on growth of higher taxes. Overall, fiscal policy is still expected to tighten over the forecast, but all else equal, the changes announced in the budget are expected to reduce the margin of spare capacity in the economy over the forecast period.
The marginal effects on our inflation projections from the Autumn Budget, as shown in chart five just come up: combined measures push up on inflation by just under half a percentage point at their peak. That's the white line. The extended freeze on fuel duty pushes down on inflation over the next fiscal year. That's the orange bars. But as it is assumed to rise thereafter in line with announced government policy, fuel duty then pushes up on inflation from the second quarter of 2026. Other measures do directly push up on inflation over the first year. That's the purple bars.
Now, there are different ways in which the increase in employer National Insurance contributions could play out in the economy. It represents an increase in the cost of employment. There are at least four margins of adjustment: firms could pass on higher costs to consumer prices, or firms could absorb the increase through lower margins or higher productivity. Firms could increase wages by less, or firms could respond by reducing employment. Now, let me be clear: public policy measures of this kind serve other objectives, and it's not for us to apply one way or the other. What we must do is respond to any consequences for inflation in order to meet our 2% target over the medium term.
Now, we will get information on how the consequences for inflation evolve over time. A gradual approach to removing monetary policy restraint will help us to observe how this plays out, along with other risks to the inflation outlook. Developments in the UK labor market continue to be very important for assessing developments and inflationary pressures. There are mixed signals from the data. Wage growth remains strong relative to our models, perhaps reflecting some continuing real wage catch-up in a still relatively tight labor market.
As chart six shows, annual growth in private sector regular pay, that's in blue on the left-hand side, has eased to 4.8% in the three months to August, down from a peak of just above 8% in mid-2023. And indeed, in line with our expectations in August, a normalization in inflation expectations and an easing in labor market tightness have supported that moderation in pay growth. Consistent with the slowing in the official measure, a Bank staff indicator model of underlying pay growth has also declined in recent quarters, pointing to underlying wage growth of around 4.8%. That's the orange line.
Along with some, but not all, outside surveys and measures seen on the right, this points to a gradual but progressive move down in wage growth towards levels consistent with the 2% inflation target. The Bank's agents also suggest that wage settlements could continue to come down, perhaps to around 2 to 4% next year, compared with 6 to 6 and a half percent in 2023. And I would add that this is the story that I've heard consistently when I've joined them recently on visits to businesses in different parts of the country.
But two further observations should give us cause to reflect. First, one-year-ahead expectations for wage growth of firms in the Bank's Decision Maker Panel seem to have stabilized at a higher level of around 4% in recent months. Second, the evidence, such as it is, points to the quantity side of the labor market remaining relatively tight while showing some loosening. Both of these observations could point to lingering persistence in wage pressures beyond what we're assuming in the projection.
So let me conclude. There's been continued progress in disinflation, particularly as previous external shocks have abated. So at this meeting, the committee voted to reduce bank rate to 4.75%. Based on the evolving evidence, a gradual approach to removing policy restraint remains appropriate. Monetary policy will need to continue to remain restricted for sufficiently long until the risks to inflation returning sustainably to the 2% target in the medium term have dissipated further. The committee continues to monitor closely the risks of inflation persistence and will decide the appropriate degree of monetary policy restrictiveness at each meeting. And with that, Claire, Dave, and I will be happy to take your questions.
Thank you. Right, we'll start today with Larry for his last press conference, and then we'll go to Faisal.
Thank you. Governor, is the message from this report that as a result of the budget, interest rates will stay higher for longer than they otherwise would have done?
Well, let me begin by echoing what Claire just said. If you don't mind, Larry, on a personal note, I know this is your last... I don't know how many of these you've done, but it must be a lot. Too many? No, that can't be true. There's no such thing as too many of these. But look, Larry, I think we all want to join before answering the question together and thank you for all you've done for the British Economic Journal and wish you all the best for the future. It's been a pleasure working with you. And you are, of course, the first person ever to get applause in this press conference, because we will never get... so all the best.
So on the question about the budget, we've set out the picture. I would say, look, we've cut interest rates today, so I mean that of course is actually obviously significant in the context of the news. You'll see that the view we've reached... so the first thing I'll say, yes, there is some upward effect on inflation, but the path of inflation as we've set out, we think, you know, returns to the target in the horizon that we look at. And that is what has, you know, given us, in a sense, support for cutting rates today. But what I would say, and I just re-emphasize what I said earlier, is that there's obviously a lot that we will learn about the effects of the budget as they pass through. I think it's important that we have time to do that. We will have time to do that. And so that underlines again the message we've given today: we'll need to see how these effects pass through.
You saw I laid out quite carefully the channels through which the impact, for instance, of employer costs can work. They are obviously quite different channels. Actually, we can have combinations of those, no doubt will have combinations of those channels. And we'll want to observe very closely how that works. Our agents are fully primed to go out and start asking about it, and we'll want to get that information.
Can I add one thing? Just, I mean, the market curve always moves around. And as we flag in the minutes, I mean, in the run-up to the budget, it was being pushed up by US data developments. That's quite common. There has been movement since the budget, but we're seeing, you know, quite a lot of movement in the curve at the moment given the events that are taking place either domestically or globally.
I can add a bit about the detail, if you like, on the impact of the budget as we have seen it. You can see in our projections we've been quite clear. So obviously, you know, the front-loaded fiscal loosening that the budget represents means we've got higher inflation by 0.3 percentage points at the end of next year, 0.4 the year after, 0.3 the one after that. That's quite similar to what the OBR have actually. They've got a slightly different profile because we have slightly different views on the multipliers. They're slightly more front-loaded. But you can see there the impact of the budget on inflation, and that is of course setting the much wider context of what we've seen on inflation in terms of actually the numbers coming down and coming down more than we expected recently, but also on the inflationary pressures that we see, and those also coming down, which explains basically the decision today.
Faisal Islam, BBC News. Just to reiterate that point, should people at home, should households expect mortgage rates, for example, to be higher than they otherwise would be, even a bit, as a result of the budget? And are you happy that the market response post-budget has been orderly?
Well, I think on mortgage rates, we've actually seen some reduction in mortgage rates since the August report. Obviously, we've cut rates today, so we'll see how that feeds through. But obviously, how it feeds through for most mortgages now depends on how the curve moves, because most mortgages are priced off the swap curve because they're mostly fixed-rate mortgages. So I don't think that it's sensible to conclude that the path of interest rates will be particularly different in that respect. And of course, we don't set out an expected path ourselves because we respond to the news as we see it and form our views as we see it. So I would emphasize the point I made that the profile that we have of inflation starts lower, does go up, but let's be clear, when we talk about going up, these are a different order of magnitude of numbers compared to what we've been talking about in press conferences here for recent years. And it's an altogether better magnitude in that sense. But then the key point is that it comes back down to target, we think sustainably, within the forecast period.
So just to reinforce Andrew's point, I mean, the curve, what we've seen, you know, the two-year rate for a 75% LTV mortgage has come down by 78 basis points since May. So that's in chart 2.7. That shows you what's happened to all the key savings and borrowing products. And as Andrew is saying, that's been, you know, the reference rate for that important mortgage is the OIS rate, which has also come down over that period. But I think just on the second part of your question, Faisal, and just looking at market movements over the last week or two, I mean, to start with, I think if you go back to the beginning of last week, I think the market was positioned long at the sort of shorter end of the Sterling curve, so it was positioned for lower interest rates. I think what you saw in the latter part of last week was some adjustment there. There was some closing of those positions as the curve moved up. Not surprising because those positions have stop-loss orders on them typically, and those stop-loss orders can be quite highly correlated. I think that process happened. So we've had that process, but then of course what happened was, and this was really from Friday afternoon onwards, that the dominating event was the US election, not anything going on in this country. And the curve obviously has been moving around quite a lot over recent days, but it's quite clear that that's been the more dominant factor. And I think what we were picking up from market intelligence was that there was quite a reluctance in the market to take positions while the outcome of the US election wasn't known. So you did get, I think, these two things coinciding. I think there was some closing out of positions in Sterling into a market which was increasingly, certainly from Friday afternoon onwards, not really wanting to take positions given the uncertainty of the outcome of the US election. So I think that's the context. But I think now, look, you look at the market today, it's pretty settled today. And throughout the period, because obviously you'd expect us to keep a very close eye on monitoring, we've been seeing market conditions.
Yeah, great. Let's go to Helia and then Sam, please.
Helia Ebrahimi, Channel 4 News. Governor, what's your message to households today? You seem to be saying that you're cutting interest rates because inflation is coming down, in fact, it's coming down faster than you expected. But you're also in the book saying that inflation isn't returning to target now until the middle of 2027, compared to the middle of 2026 which you thought before the budget. On balance, has the budget made your job harder?
So the message I would... let's take two parts to the message. The first part is, you said quite rightly, look, we've got good news. The disinflation process, as I showed in the first chart, not only continues but actually has been faster than we expected, and not just faster over the last year, faster than since we were last here in August. And that's good and it's encouraging. There is greater uncertainty out there now. I would point to two things. First of all, there is greater global uncertainty, without doubt. The second thing to say is that there are, of course, domestic uncertainties. And I pointed to two of them in my remarks. One was just, we need to obviously see how the budget measures pass through in terms of their economic effects. And then I pointed again, as I have done in the past, obviously to the labor market and how the adjustment of the labor market continues. And those things obviously are related as well. So it's a point about uncertainty, and that's why, as you'll have observed, the word 'gradual' once again appears in our language.
Thanks. Sam Fleming from the Financial Times. In Box D, you talk about unexplained strength in import prices in the report and its importance for inflation. In that light, could I ask you about the result of the US election and the potential for higher protectionism, trade barriers, tit-for-tat retaliation around the world? How do you think about that in terms of upside and downside risks, especially in light of what I mean, I'm sure Claire wants to come in, but let me make two points to start with.
First of all, the point we were making on import prices is not really about the US election at all. It's really based on an observation in the data that the relationship between world export prices and Sterling and UK Sterling import prices has not moved as we expected. In a sense, they've not really moved together. We've seen some divergence with stronger UK import prices than we would have expected based on world export prices. And frankly, we've adjusted our assumption to reflect the fact that we don't see any evidence of that really coming to a conclusion. On the second point about the US election, can I just make this point: first of all, we always respond to announced policies, and that's true in the world, it's true in the UK, not to stories about what they might be. So we're not going to respond to anything. The second thing I make, just to be very clear on this, we work with all US administrations, more obviously on the financial stability side than the monetary policy side, because that's the nature of financial stability versus monetary policy. But we work with all administrations. We will look forward to working with the new US administration. We worked with the previous Trump administration, we work with the current administration, and that's our job. I mean, that's what we do. We do it without any presumptions, and we will do that constructively.
I've not much to add on the import box and the global export price, except to sort of reiterate your point that what we've done here has made a change in our judgments reflecting what we're seeing in the data particularly. And the effect is not insignificant on inflation further out.
Can we go to Sue and then Joel, please.
Hi, Sue Chan from the Telegraph. Just following on from Sam's question, I wouldn't dare ask you a question about policy, but just about the structure of the UK economy. How exposed is the UK economy to a potential global trade war? And given the UK exports more services as opposed to goods to countries like the US, are we more immune?
Well, I mean, the UK is an open economy. Let's, you know, that's one of the things we always say about the UK economy, and it's true. It's an open economy. Of course, many economies are open, so we're not unusual in that respect. So look, I think we will have to watch this very closely, as we will watch it very closely. As I said, I'm not going to make any presumptions about what will happen because I don't think that's either consistent with our policy remit or wise, frankly. I think let's see what happens. And there will, I'm sure, be a very open dialogue between both our government and the US administration. And I say we, appropriate just to reiterate the point, we work very closely with US administrations because it's obviously the right thing to do. And we will, no doubt, over time be able to get a better sense of what the policies are and then, to answer your question, how they might affect the UK economy. And of course, we'll do that. But I'm just not going to... I don't think it's useful or wise to enter into speculation at the moment of what they might be because we just don't know.
Joel Hills from ITV News. I have a couple of questions. We have had a significant rise in UK interest rate expectations in the last few weeks. How much of that do you assess is down to domestic UK factors and how much of that is down to international factors, please? And you have just cut to 4.75%, a level you say is restrictive. You'll get a round of applause if you do answer this one. You are talking about gradually removing policy restraint. What level of interest rates would policy no longer be restrictive, please? Because you must have that in mind when you make those statements.
Well, that's of course the Ben Broadbent Memorial question. Yeah, but you're probably safe from getting the Ben Broadbent Memorial answer where he'll talk about John Williams, the Welsh economist. So we'll save you that one. Look, to start with the interest rate points, let me give you one I think quite interesting fact. And actually, I'll go back to... we take it back to a couple of days ago. If you look at movements along the interest rate curve from the beginning of October to a couple of days ago, and you compare the US curve with the UK curve, they basically moved by about the same amount.
Comments there from the Governor of the Bank of England, Andrew Bailey, following that announcement that the bank is going to lower, has lowered interest rates to 4.75%. In response on the market, Sterling rose 0.4% against the US dollar, 0.2% higher against the Euro. Elsewhere, the Bank of England's Monetary Policy Committee said that the Chancellor's 70 billion pound package of tax and borrowing measures will deliver a three-quarter point increase to GDP next year.
You're watching Sky News. Still to come throughout the course of this afternoon, we'll bring you all the latest from the United States. We're expecting Joe Biden to make an address from the White House to the nation at around 4:00 p.m. local time here in the UK. We'll bring you all of the developments as they happen. Plenty more insight, analysis, and coverage on the Sky News website and the Sky News app. Stay with us, of course, for the full story first.
Hello, good afternoon. It's 1:00. You're watching Sky News. These are the headlines: interest rates decision down to 4.75%. The Chancellor says it's welcome news for millions of families. The economy is growing, interest rates and inflation are coming down. That is a world away from the last Parliament. Live in Philadelphia here in the United States, later this afternoon we'll hear from Joe Biden for the first time since Donald Trump's comeback election victory. Today, the President-elect starts to put together his top team as he's invited for transition talks at the White House. Kamala Harris bows out, telling supporters to accept the result but never give up on the future fight. We'll bring you President Biden's address from the White House live here on Sky News at 4:00 this afternoon.
Also this lunchtime, the suspended Labour MP Mike Amesbury is charged with common assault following an incident in Cheshire last month. And the UK announces new sanctions on Russia at a meeting of European leaders in Hungary, focusing on the future for Ukraine under President Trump.
Hello, good afternoon. The Bank of England has cut its interest rate in what is only the second decrease in more than four years. It comes as inflation is at its lowest level in over three years, although the bank did warn that the Chancellor's budget delivered last week will contribute to a rise in inflation. Well, now the rate stands at 4.75%. A short time ago, we heard from the Governor of the Bank of England, Andrew Bailey, who was asked how the Chancellor's first budget affected the rate decision.
Hey, look, we've cut interest rates today, so I mean that of course is actually obviously significant in the context of the news. You'll see that the view we've reached... so the first thing I'll say, yes, there is some upward effect on inflation, but the path of inflation as we've set out, we think, you know, returns to the target in the horizon that we look at. And that is what has, you know, given us, in a sense, support for cutting rates today.
Well, let's bring in our business and economics correspondent, Gurpreet Narwan. So, Gurpreet, it was expected, good news for mortgage holders. How much bearing has the budget had on this, do you think?
Yeah, it was a widely expected move. The Bank of England shaving off a quarter of a percentage point off the base rate, taking it to 4.75%. It marks just the second interest rate...
Rate cut in four years, so good news for mortgage holders as you pointed out, and further evidence that the bank is confident that we're really turning a corner on inflation now. Andrew Bailey, in his press conference, said that the disinflationary process has progressed well and crucially, he said it was happening faster than expected. The Bank of England, the members of the Monetary Policy Committee, will have taken a number of factors into account beyond the headline rate of inflation, which fell below the 2% target in September to 1.7%. It would have also looked at services inflation as well as wage growth, although Andrew Bailey did say he was a little bit concerned that services price inflation wasn't falling as quickly as he'd like to. Good news for mortgage holders then, this will feed in to lower mortgage rates for the 1.5 million households or so who are on variable mortgages. For someone with a mortgage of about £100,000, that will translate into a saving of £25 a month. And as you can imagine, it's good news for the government as well. Rachel Reeves, the Chancellor, had some warm words to say about it. Let's have a listen to what she had to say.
Interest rates are now on a downward path, evidenced by the cut in interest rates today by the Bank of England. And both the Office for Budget Responsibility and indeed the Bank of England forecast today shows that the economy is growing, interest rates and inflation are coming down. That is a world away from the last Parliament, which was the worst Parliament on record for living standards, with inflation reaching more than 11%, interest rates spiking after the mini-budget, and growth stagnant.
But there were some aspects of the Bank of England's monetary policy report today that would have made Rachel Reeves a little bit nervous. Because although the bank said it was confident that rates would come down gradually, it also pointed out that the Chancellor's budget is inflationary. It said that that big fiscal stimulus, the increase in government spending that the budget contained, would increase growth in the short term, but that it would also add half a percentage point to inflation in two years' time. So a clear warning sign that the path of interest rates might be slower to come down than initially expected.
Yeah, good afternoon then, live from Philadelphia in Pennsylvania, one of the key battleground states that helped Donald Trump win the presidency. We are here on those famous Rocky steps. It was right here where Kamala Harris delivered her big finale amid hope and expectation, backed by a cast of A-list stars, Lady Gaga, Oprah Winfrey, Ricky Martin as well. Well, later on this afternoon, in a few hours' time at 4:00 p.m. in the UK, we will hear from President Joe Biden for the first time since the election result was announced. He is speaking to the nation from the White House. We will bring that to you live here on Sky News. Well, last night Kamala Harris promised a peaceful transfer of power as she addressed disappointed campaigners in Washington. As our US correspondent Martha Kelner now reports.
The stage had been set for a victory party, but sooner than anyone expected, Kamala Harris here to acknowledge a defeat so colossal there could be no question.
While I concede this election, I do not concede the fight that fueled this campaign.
Many in this crowd had been here the previous evening. They'd hoped to see America's first female president. Harris offered her supporters reassurance and urged resilience.
Do not despair. This is not a time to throw up our hands. This is the time to roll up our sleeves.
She'd earlier phoned President Trump to congratulate him. She promised the transfer of power would be peaceful this time round.
A fundamental principle of American democracy is that when we lose an election, we accept the results.
Kamala Harris struck an optimistic tone, but there's no escaping the completeness of this defeat. And now the soul searching: could they have done anything differently? And what next for her and the Democratic Party? Much of the ire is focused on President Biden. Did he cling to power too long, giving Harris too much to do in too short a time?
I genuinely do think so, because she had the shortest campaign in history. I think that he should have stepped down a little bit sooner and allowed her to really flourish and build her campaign a lot earlier.
Do you think she might have been too loyal to President Biden?
People are going to have critiques no matter what. Had she been more aligned, they would have critiqued. If she was completely on the other side of that, they would have critiqued. My gut says that racism and sexism, the rooting of fascism and authoritarianism in this country, is very real.
What do you think went wrong?
Too much part of it is that our country is just not ready for a woman, unfortunately. There's also this segment of America who just wants the old white guy.
Women who are part of the same sorority as Harris were grieving what could have been. We had expectations that women would stand up for themselves and our reproductive rights, and they didn't do it. And I guess that's the end of the story. I think it shows that we're in a very hateful state right now, and people just need to wake up and smell the roses.
