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UK economy on the brink as Rachel Reeves sent dire interest rates warning.l

Cutting interest rates in the UK can stimulate economic growth by making borrowing cheaper and encouraging spending, but it may also lead to higher inflation, reduce returns for savers, and weaken the currency.

Rachel Reeves

Rachel Reeves has been warned the Bank of England must urgently cut interest rates (Image: Getty)

Failure to cut interest rates next week will jeopardise the UK’s economy, Chancellor Rachel Reeves has been warned.

The Bank of England is expected to cut interest rates next week, despite forecasts that Labour’s autumn Budget could lead to higher inflation over the coming year.

But Graham Cox, a director of loan broker Bridging Hub, said failure to act would be even more risky.

Policymakers at the Bank, with whom the decision rests, will announce the result of their November meeting on Thursday, where most analysts think they will trim the base rate by a quarter-point to 4.75%.

Mr Cox said: “Another base rate cut appeared inevitable on November 7.

“But with UK gilt yields rising in response to the Chancellor’s Budget, the Bank of England Monetary Policy Committee may adopt a wait-and-see approach until the next meeting in December.

“I hope they don’t. Now is not the time to be timid, as the UK economy is barely growing and many people, despite the cost of living crisis technically being over, are struggling to make ends meet. The Bank must cut now.”

Jack Tutton, director at SJ Mortgages, added: “The Bank of England need to stick to their guns and cut the base rate was widely predicted prior to the Budget.

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“A further cut will show their confidence in the UK’s economic lookout which is much needed, especially after the markets’ initial reaction to the Budget last week.”

Chancellor Rachel Reeves

Chancellor Rachel Reeves delivers her Budget in the Commons last week (Image: House of Commons)

Last month, official figures showed that the headline rate of inflation dipped to 1.7%, its lowest level since April 2021, while services sector inflation also fell, boosting hopes that rate-setters will vote to cut.

The base rate, which helps to dictate mortgage rates and borrowing costs, currently sits at 5%, after it was hiked in recent years to bring inflation down to the Bank’s 2% target.

Meanwhile, the most recent figures for wage growth show it also slowed to its lowest level in two years, with average regular earnings growth easing back to 4.9% in the three months to July.

Thomas Pugh, an economist at the consultancy RSM, said the two factors mean a rate cut is “nailed on”.

The Monetary Policy Committee meets in the week after Chancellor Rachel Reeves announced almost £70 billion of extra annual spending, funded by business-focused tax hikes and additional borrowing.

The Office for Budget Responsibility (OBR) said the sharp increase in spending will contribute to higher inflation, although it will also help drive stronger economic growth.

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Inflation is forecast to average 2.5% this year and 2.6% next year before coming down, assuming “the Bank of England responds” to help bring it to the target rate, the OBR said.

It has prompted economists to reel in predictions for a rapid succession of rate cuts over the next year.

Mr Pugh added that after the fiscal loosening in the Budget, rates are “likely to fall more slowly over the course of the next year. Indeed, a sequential rate cut in December now looks unlikely.”

Markets were pricing fewer than four quarter-point cuts from the Bank up to the end of next year, down from a little under five before the Budget.

Matt Swannell, chief economic adviser to the EY Item Club, said he does not think Ms Reeves’ tax-and-spend Budget will “prevent future interest rate cuts”.

He said: “At its November meeting, the MPC will probably continue to indicate that it is more confident inflation persistence is easing, but that Bank Rate will have to remain restrictive for some time and that future rate cuts will likely be gradual.”

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