The Bank of England expects Rachel Reeves’s budget will reduce the UK’s headline inflation rate by as much as half a percentage point next year.
In a boost for the chancellor after last month’s high-stakes tax and spending statement, Clare Lombardelli, a deputy governor at the central bank, said its early analysis showed the policies would lower the annual inflation rate by 0.4 to 0.5 percentage points for a year from mid-2026.
Reeves made cutting inflation a central ambition of her budget alongside a sweeping £26bn package of tax increases to cover a shortfall in the public finances and fund scrapping the two-child benefit policy.
Her measures to ease the cost of living included removing green subsidies from household energy bills and freezing rail fares. Levies on energy bills will now be paid out of general taxation, which the Treasury said could reduce bills by an average of £150 a year from next April.
The Bank’s early assessment, which matches the prediction published by the Office for Budget Responsibility alongside Reeves’s statement, said the bulk of the reduction was down to the energy bills measures and the chancellor freezing fuel duty for motorists.
Threadneedle Street is widely expected to cut interest rates at its policy meeting on Thursday next week. Financial markets are anticipating a cut in borrowing costs to 3.75%, down from 4% and the sixth reduction since a recent peak of 5.25% in the middle of last year.
Lombardelli, a member of the Bank’s rate-setting monetary policy committee (MPC), said the central bank would take into account Reeves’s budget measures, although cautioned that longer-term inflation prospects would be important to take into account.
Although Reeves’s measures will have a short-term impact on bringing down headline inflation, other government policy measures could push up the rate in future. Business leaders have said higher employment costs from a rising living wage and strengthened package of workers’ rights could force them to push up prices.
“This is new information the committee will consider,” Lombardelli said of the budget. “[We need to consider] how much are you affected by one-off, one-year short-term impact of inflation.”
She said views would differ on the MPC as to where the balance lay, but suggested a short-term headline rate cut could help stifle future inflationary pressures by influencing how businesses and consumers pushed for wage increases and set prices.
“People’s experience of inflation changes how they may respond,” she said. “Energy is a really strong example of that. These are very visible cost reductions in that space.”
While the chancellor’s measures aim to reduce bills, other costs are due to be added soon to cover the £28bn of spending on Great Britain’s gas and electricity grids approved by the regulator Ofgem last week.
Headline inflation has fallen back from a peak of over 11% in late 2022, before accelerating again this year amid a rise in food prices, energy costs, utility bills, and as businesses passed on the cost of tax increases.
Despite a fall to 3.6% in October, the headline rate remains above the Bank’s 2% target. Threadneedle Street has previously indicated that inflation probably peaked at 3.8% this summer, and suggested before the budget that inflation could fall to about 2.5% next year.
