09:09 AM EST, 11/07/2024 (MT Newswires) -- Nobody was very surprised that the Bank of England cut interest rates on Thursday with the Bank Rate lowered by 25bps for the second time this year, which leaves it at 4.75%, said ING.

Instead, everyone wanted to know what the BoE made of the latest United Kingdom budget, wrote the bank in a note to clients. Big spending increases will, investors have assumed, reduce the scope of the BoE's rate-cutting cycle.

Take a glance at the BoE's new forecasts, and it's tempting to conclude that the Bank agrees, stated ING. Growth is higher and it expects inflation to be at 2.2% in two years. On paper, that's a very subtle way of saying that if interest rates were to follow the path expected by markets, then inflation would still be fractionally above target.

However, that would be the wrong conclusion to reach, pointed out the bank. There's a big caveat to all of this which is that the BoE hasn't accounted for the market reaction to the latest budget in its new forecasts. The numbers are based on market rates averaged out over several days up until Oct. 29, the day before the budget was announced.

Markets are now pricing Bank Rate some 40bps higher this time next year than in the numbers used by these latest forecasts. In other words, if the models were run again today, the upward forecast revisions to growth and inflation would be more muted, added ING.

In fact, away from the forecasts, the analysis of the budget looks much more nuanced. Take the tax hike on employers. The hawks might argue that firms are likely to pass on those costs in the form of higher prices, but the Monetary Policy Committee as a whole is reluctant to reach that conclusion.

There's plenty of discussion about the uncertainty of how the budget will affect the economy, and the BoE has also emphasized that fiscal policy will become tighter beyond next year.

In short, the BoE is refusing to be drawn on where interest rates are likely to go next, noted the bank.

It was always very unlikely that Governor Andrew Bailey would also choose to double down on his comments a month ago when he hinted that rate cuts could become "more aggressive." Interestingly, the BoE has used its latest Monetary Policy Report to play down the latest fall in services inflation which, at 4.9%, is well below the BoE's forecast from August. It expects those numbers to stay broadly unchanged into the end of the year.

ING thinks a December rate cut now looks unlikely. Previously the bank thought that the BoE would accelerate its cutting cycle beyond Thursday, but uncertainty surrounding the budget's impact has changed its mind on that.

But the overarching message from the Bank Thursday is that while the budget will have some impact, it's just one of several factors affecting the inflation outlook right now. If services inflation continues to fall more meaningfully next year, as many of the surveys seem to indicate, then the bank believes investors are still likely to see rate cuts accelerate.

Markets are pricing fewer than three rate cuts from here on in, according to ING. That would leave UK rates more than two percentage points above the European Central Bank in a year or so.

The bank doesn't think that sounds particularly realistic. ING's view is that rate cuts will be cut at every meeting from February until rates reach 3.25% next fall.