By Andy Bruce

LONDON (Reuters) – The Bank of England is likely to cut interest rates on Thursday for only the second time since 2020, but the big question for investors is whether the BoE will signal its subsequent moves following the government's inflation-raising budget.

The BoE has had almost a week to assess new finance minister Rachel Reeves' first set of tax and spending plans, which Britain's official budget forecaster believes will raise inflation as well as economic growth next year.

Consumer prices are projected to rise by 2.6% in 2025, according to the Office for Budget Responsibility's forecasts, considerably above the BoE's 2% target, largely because of the budget.

This projection was a major reason why investors have reduced their expectations for repeated interest-rate cuts next year.

The outlook has also been complicated by the economic agenda of U.S. President-elect Donald Trump, who plans to impose tariffs on all imports.

However, BoE Governor Andrew Bailey and his colleagues are unlikely to provide a detailed view on Trump's return to the White House, given the limited time to assess the U.S. election's implications ahead of their Wednesday decision deadline.

Even before Reeves' high-borrowing, high-spending budget announcement, investors had identified Britain as an inflation outlier due to its persistent wage growth and other price pressures from the domestic services sector.

RATE CUT TO 4.75% EXPECTED

All 72 economists polled by Reuters anticipate the BoE will reduce its Bank Rate to 4.75% from 5.0% on Thursday, and financial markets showed a 97% chance of this outcome on Wednesday.

Investors are also expecting between two to three additional cuts by the end of 2025, down from almost four prior to Reeves' budget presentation.

In contrast, markets are anticipating over five rate cuts by the European Central Bank between now and the end of 2025.

"The budget won't change the Bank's decision to cut rates again this week," said James Smith, a developed markets economist at ING, adding that it raises questions about the pace of further cuts.

Smith expressed uncertainty about whether the BoE's forecasts will reflect Reeves' plans or just be briefly noted in the Monetary Policy Committee's minutes. Typically, Bank staff complete a final draft of their economic forecasts a week before voting on interest rates, coinciding with the budget release.

British government bond prices fell immediately after the OBR's budget assessment was published, which showed Reeves meeting her new fiscal rules by a slim margin, coupled with higher forecasts for the Bank Rate and government bond yields.

While most economists expect a rate cut on Thursday, they do not foresee another cut as soon as the BoE’s next meeting in December due to the elevated inflation outlook post-budget.

"It is customary for the BoE to overlook fiscal policy changes, but it would be tone-deaf to do that this time," remarked Andrew Wishart, an economist with Berenberg Bank.

"The BoE should emphasize fiscal policy as a reason for maintaining a 'gradual approach to removing policy restraint': likely one cut per quarter."