The Bank of England has forecast Rachel Reeves’s first Budget will increase inflation by up to half a percentage point over the next two years, contributing to a slower decline in interest rates than previously thought.

The Bank’s quarterly Monetary Policy Report found the Chancellor’s £70 billion package of tax and borrowing measures will also deliver a three-quarter point increase to Gross Domestic Product next year. 

The Bank forecasts the increase in employer NICs will impact on prices  in the first half of next year, with the addition of VAT to private school fees and the £1 increase in the bus fare cap to £3. 

Meanwhile this week’s interest rate cut by the Bank of England – from 5% to 4.75% – will “likely be the last” for 2024, according to an economist at consultancy firm RSM UK. Thomas Pugh says this is due to the government deciding to increase borrowing and public spending in last week’s Budget, which will likely see inflation go back above the 2% target.

Capital Economics chief UK economist Paul Dales says: “We agree and, due to the Budget (and not the US election), have concluded that rates will fall slower to only 3.50% in early 2026 rather than to 3%.  That would still take rates below the 4.00% investors currently expect.

“The Bank of England has delivered one more cut for the road, before it’s widely expected to shut up shop for a while and wait for the dust to settle. More borrowing in the Budget, a higher national living wage and rises in employer National Insurance contributions, have raised concerns that inflation could make an unwelcome return” 

claims Sarah Coles, head of personal finance at business consultancy Hargreaves Lansdown.

The slower pace of rate cuts “means better news for savers and those searching for an annuity, but bad news for mortgage borrowers” she adds.

Chancellor Rachel Reeves, said: “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. This government’s first Budget has set out how we are taking the long-term decisions to fix the foundations.”

Shadow chancellor Mel Stride says the rate cut will be welcomed by 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.”.