Interest rate cut to 4.75% - marking just the second reduction in almost four years

By Henry Moore

The Bank of England has cut interest rates by 0.25 percentage points, marking just the second reduction in almost four years.

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The Bank of England has cut interest rates for just the second time in four years as it warned Labour’s Budget will raise inflation in the coming years.

Rates fell from 5% to 4.75% in what the Chancellor said would be "welcome news" for working families.

"Today's interest rate cut will be welcome news for millions of families, but I am under no illusion about the scale of the challenge facing households after the previous Government's mini-budget," Rachel Reeves said.

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"This Government's first Budget has set out how we are taking the long-term decisions to fix the foundations to deliver change by investing in the NHS and rebuilding Britain, while ensuring working people don't face higher taxes in their payslips."

Bank of England governor Andrew Bailey added: "We need to make sure inflation stays close to target, so we can't cut interest rates too quickly or by too much.

"But if the economy evolves as we expect it's likely that interest rates will continue to fall gradually from here."

Despite its decision to cut rates, the BoE warned that inflation is likely to stay higher for longer in the wake of Labour’s autumn Budget.

It warned increases to employer taxes and the minimum wage could be "more inflationary" if prices are passed on to consumers.

Explaining the effects, policymakers said: "On the one hand, higher labour costs could constrain firms' cash-flows if there was limited pass-through to pricing.

"This in turn could moderate wage growth and further loosen the labour market through reduced labour demand.

"On the other hand, the increase in labour costs could prove more inflationary if upward pressure on prices were passed on to consumers."

The pound rallied in the wake of the cut, increasing 0.4% to 1.293 US dollars and was 0.2% higher at 1.202 euros.

Shadow chancellor Mel Stride said: "This will be welcomed by millions of homeowners and builds on the work the Conservatives did in office to hold inflation down.

"However, the independent OBR and the Bank of England set out that as a result of Labour's choices in the Budget last week inflation will be higher.

"The Government must not undo the hard work the last government did."