bank of england poised for second interest rate cut amid fiscal changes

The Bank of England is expected to lower interest rates for the second time this year, despite recent fiscal policy changes that could boost short-term demand.

Economic Outlook

Economists predict a quarter-point reduction in the benchmark interest rate, bringing it down to 4.75 percent. Market traders are confident in this anticipated rate decrease, with a 90 percent probability assigned to it. Chancellor Rachel Reeves' fiscal measures, which include increased public spending and borrowing, have raised concerns among financial analysts. However, many economists believe that these measures will not have a substantial immediate impact on the rate cut.

Inflation in the UK has decreased to 1.7 percent in September, below the 2 percent target. This, along with a decrease in services price growth, provides a favorable environment for rate cuts. BoE Governor Andrew Bailey acknowledges the positive trend in inflation but emphasizes the need for evidence of decelerating services inflation.

Long-Term Outlook

The long-term economic outlook remains uncertain, and the BoE may not commit to cutting rates at every meeting moving forward. The financial markets reacted to the fiscal easing announced by Reeves, leading to fluctuations in UK government bond prices. Despite this, data on wages and prices suggest a continued easing of inflationary pressures, supporting the case for a rate cut. Economists believe that the BoE has the capacity to cut rates and may continue to do so throughout the next year.

Interplay between Fiscal and Monetary Policy

The interplay between fiscal policy and monetary policy will be crucial in shaping the UK's economic landscape, and the upcoming MPC meeting will be closely watched.

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