Bank of England set for second cut after Labour reveals tax-hiking budget

Sweden’s Riksbank cut interest rates by 50 basis points on Thursday and signaled further trims to come as global central banks are seen syncing their monetary policy easing.

The bumper reduction — its first such move in a decade — brings the bank’s key rate to 2.75% and follows a previous 25 basis points cut in September.

“If the outlook for inflation and economic activity remains unchanged, the policy rate may be cut again at the next monetary policy meeting in December and during the first half of 2025,” the bank said in a statement.

— Karen Gilchrist

U.K. borrowing costs ticked slightly lower Thursday ahead of the Bank of England’s rate decision, softening a recent rally that has pushed gilt yields to their highest level in more than a year.

The 10-year gilt yield slipped two basis points to trade at 4.536% by 9:30 a.m. London time, while the 2-year gilt yield was three basis points lower at 4.481%. Yields move inversely to prices.

Bond yields spiked last week as investors pondered the extent of excess borrowing and increased taxes announced in the Labour government’s Oct. 30 budget. That rally has since continued into this week, with 10-year yields hovering near their highest level since October 2023 following the conclusion of the U.S. presidential election on Wednesday.

Sterling picked up on Thursday despite broad expectations that the Bank of England will trim interest rates.

The British pound was up 0.38% against the U.S. dollar and 0.25% higher against the euro at 8:43 a.m. London time.

Interest cuts typically pressure down currency. Investor focus will now shift toward whether the Bank of England will continue on the path of monetary easing, given the recent release of its tax-hiking budget that some economists see as potentially inflationary.

— Ruxandra Iordache

The U.S. Federal Reserve is also set to deliver its latest interest rate decision on Thursday, following the conclusion of the U.S. presidential election.

The Fed is expected to cut rates by 25 basis points, having kicked off its rate cutting cycle with a jumbo 50 basis points reduction in September.

— Karen Gilchrist

U.K. inflation fell sharply to 1.7% in September, ramping up expectations for a November rate cut from the Bank of England.

The reading, which came in below expectations, marked a significant decline from August’s 2.2% print and the first time inflation has fallen below the BOE’s 2% target since April 2021.

Analysts have suggested that the decline could be short-lived, however, with an increase in the regulator-set energy price cap likely to push up prices slightly last month.

Britons are facing the prospect of higher mortgage rates for longer after the government’s tax-and-spend budget threw off expectations for a series of near-term interest rate cuts.

Mortgage rates took a hit last week when a number of lenders raised borrowing costs amid concerns that Reeves’ fiscal plans could push up growth and inflation, thereby delaying the BOE’s easing path.

“It’s confusing times for mortgage borrowers when expectation is for a base rate cut … but fixed rates look set to rise,” David Hollingworth, associate director at broker L&C Mortgages, said in a statement Friday.

Virgin Money became the first major lender to raise mortgage rates after the budget, lifting them by 0.15%. Some banks diverged on their outlook, however, with Santander reducing rates by 0.36%.

The average five-year fixed mortgage rate is now at 4.64%, down from 5.36% last year, while the average two-year fixed rate is 4.91%, down from 5.81% over the same period in 2023, data from property portal Rightmove showed last week.

“This isn’t the radical spike in rates that have blighted mortgage rates in the last couple of years. But if funding costs don’t ease, the sub 4% 5-year fixed rates that we’ve become used to in recent months could be under threat,” Hollingworth continued, noting that more lenders might reconsider their rates going forward.

— Karen Gilchrist