Surge in household budgets will put growth plan in peril

Rachel Reeves has been given an inflation warning by the Bank of England, as it cut interest rates to their lowest level in two years but forecast months of sharp price rises driven by higher food prices.

- KATE DEVLIN WHITEHALL EDITOR

Days after the chancellor was warned of a £50bn black hole in the government’s finances, the Bank said Ms Reeves’s national insurance hike and the rise in the minimum wage were helping to push up the cost of the supermarket shop.

There was relief for borrowers, as the interest rate was cut to 4 per cent. But the Bank said headline inflation would accelerate to 4 per cent by September, while inflation on food is set to hit 5.5 per cent between now and Christmas - putting a squeeze on household budgets.

As a result, the Bank’s governor, Andrew Bailey, signalled that interest rates would fall more slowly in coming months, saying they were “still on a downward path” but that changes would have to be “made gradually and carefully”.

Amid fears that the rate cut could stoke inflation, the Bank’s Monetary Policy Committee was split and was forced to take a second vote for the first time in its history in order to break the deadlock. The forecasts pile more pressure on the chancellor, less than 24 hours after Sir Keir Starmer pledged that this autumn’s Budget will make sure “people feel better off”.