The Bank of England cut interest rates on Thursday for only the second time since 2020 and said future reductions were likely to be gradual, seeing higher inflation and growth after the new government’s first budget.

The Monetary Policy Committee voted 8-1 to cut interest rates to 4.75% from 5%, a stronger majority than expectations in a Reuters poll for a 7-2 vote in favour of a cut. Catherine Mann dissented, preferring to keep rates on hold.

“We need to make sure inflation stays close to target, so we can’t cut interest rates too quickly or by too much,” BoE Governor Andrew Bailey said in a statement.

“But if the economy evolves as we expect it’s likely that interest rates will continue to fall gradually from here,” he added, broadly echoing his language after September’s meeting.

The BoE predicted that finance minister Rachel Reeves’ budget last week — which entails big increases in tax, spending and borrowing — would boost the size of Britain’s economy by around 0.75% next year but barely improve annual growth rates in two or three years’ time.

Her plan was likely to add just under half of a percentage point to the rate of inflation at its peak in just over two years’ time, the BoE said, causing inflation to take a year longer to return sustainably to its 2% target.

The BoE’s cautious language on the future interest rate cuts was similar to previous months, in keeping with investors’ view that it is likely to cut interest rates more slowly than the European Central Bank.

The BoE did not refer to Donald Trump’s US election victory, which has prompted a big reduction in bets that the Federal Reserve will cut interest rates aggressively.

Financial markets on Wednesday were pricing between two and three interest rate cuts from the BoE in 2025 – down from around four before the budget.

The BoE said inflation was likely to rise to around 2.5% by the end of this year from 1.7% in September and hit 2.7% by the end of next year, before falling gradually below its 2% target by the end of the three-year forecast.

Government decisions to raise the cap on bus fares, hike value-added tax on private school fees and increase employers’ social security contributions were likely to boost inflation.

With the latter measure combining with a 6.7% hike in the national minimum wage, the BoE said employers faced rising costs – although it could not be certain of the overall effect on inflation as employers might respond by sacking staff or accepting lower profits.

While the BoE downgraded its forecast for average economic growth this year to 1% from 1.25%, reflecting recent revisions to past growth, it raised its forecast for 2025 to 1.5% from 1%.

“This reflects the stronger, and relatively front-loaded, paths for government consumption and investment more than offsetting the impact on growth of higher taxes,” the BoE said.

While the BoE’s forecasts for growth and inflation include the impact of higher spending and taxes, they do not include the effect of a big rise in market borrowing costs since the budget as it set those assumptions beforehand and did not update them.

If the now higher market interest rates were factored in, the outlook for inflation and growth would likely be a bit lower.

The BoE repeated its message that monetary policy would need to stay “restrictive for sufficiently long” to return inflation sustainably to the 2% target.

Participants were asked to choose between paired policy options, revealing clear inclinations. An overwhelming 70% prioritized free healthcare and education for the poor over public infrastructure. Two-thirds favoured tax relief for the middle class over cash transfers. Similarly, over 70% preferred developing villages to building cities, and a similar share leaned towards income-based reservations in private jobs over caste-based ones.

The July survey was the 12th in a series that Mint runs biannually with YouGov India and Delhi-based think tank Centre for Policy Research. It had 10,314 respondents from over 200 towns and cities and was held online. About 45% of the respondents were post-millennials (Gen Z, born after 1996), and 39% were millennials (born between 1981 and 1996).

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More respondents preferred increasing tax for big companies (63%) over having an inheritance tax (37%), and creating more government jobs for the youth (57%) over enabling private businesses to create more jobs (43%). Around 53% said the government should focus on narrowing the rich-poor gap (53%) over high economic growth (47%). The nearly 50-50 split shows the view wasn’t as one-sided as with most other questions. There was also a halfway split on keeping fuel prices low (51%) versus promoting public transport (49%).

Class gap

Opinions varied significantly based on respondents’ self-perceived financial status. Among those who considered themselves wealthy, preferences were nearly split across most questions. However, for those identifying as middle-class or poor, choices were more decisive, leaning heavily toward specific options.

Also read | India’s middle-class riddle: How much do you need to be called rich?

We asked similar questions two years ago, and the responses largely align—with one notable shift. Support for free healthcare and education for the poor has surged, rising from 59% to 70% when compared with public infrastructure. Meanwhile, the preference for cash transfers over lower income tax relief has dropped from 47% to 33%.

Despite a growing trend of political parties promising subsidies, India’s digital natives in urban areas appear less convinced by such offerings.

Budget challenge

The survey invited respondents to allocate a hypothetical government budget of ₹100 across five welfare policies. “Improving conditions of hospitals and schools” topped the list, receiving an average allocation of ₹24. This was followed closely by “creating conditions for more government jobs” ( ₹23), “investment in public infrastructure” ( ₹21), “stimulus for growth of big businesses” ( ₹17), and “direct cash transfers to the poor” ( ₹16).

The emphasis on hospitals and schools aligns with another finding from part 4 of this series, where a significant share of respondents favoured free or heavily subsidized education and healthcare. Once again, the survey indicates limited support for direct cash transfers to the poor.

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Vote impact

Do personal economic anxieties shape views on the government’s performance? The analysis reveals a clear connection between how respondents rated the last two terms of the Bharatiya Janata Party government and their perceived difficulty in job hunting.

Also read | In charts: 2024 polls changed the electoral pitch — but only a little

Currently, 47% of urban Indians say finding a job is “difficult,” up sharply from 34% in December 2022, when the survey last asked the same question. The perception of difficulty has grown most among post-millennials, rising from 35% to 51%, and among women, from 36% to 51%, compared to a rise from 32% to 44% among men. Jobs were reportedly hardest to find in mid-sized cities, followed by tier-III cities.

Among respondents who found job-hunting difficult, 27% rated both terms of the government “equally good,” while another 27% preferred the first term. About 22% thought both terms were equally poor—the highest dissatisfaction rate among groups based on job-hunting ease. Respondents facing job difficulties were five times more likely to rate the government’s 10-year record negatively (22%) than those finding jobs easy (4%).

The survey suggests a noticeable preference for public goods, more jobs, and tax reforms. The low inclination towards the private sector could be because finding jobs has got tougher across demographics and regions. However, as the government settles into its third term, it would worry about the link between voting choices and personal economic anxieties.

(The authors are associated with CPR, New Delhi.)

This is the seventh and concluding part of a series about the findings of the 12th round of the survey. The previous parts covered political attitudes, middle-class aspirations, social media use, views on welfare policies, and healthy food habits. These surveys are skewed towards urban, well-to-do netizens, with 90% of respondents falling under the NCCS-A socio-economic category.

Part 1 (14 October): 2024 polls changed the electoral pitch — but only a little

Part 2 (15 October): Making sense of urban India’s political faultlines

Part 3 (21 October): India’s middle-class riddle: How much do you need to be called rich?

Part 4 (22 October): India’s freebie paradox: Voters dislike it but want some things for free

Part 5 (28 October): How social media fed politics and strained relations during 2024 polls
Part 6 (29 October): The great Indian diet challenge: do we really know what’s healthy?