The Bank of England has cut interest rates for the first time in more than four years in a knife-edge vote that marks a boost to the Labour government’s promise to kick-start economic growth.
The monetary policy committee (MPC) voted five to four to reduce the bank’s key rate by a quarter of a percentage point to 5 per cent, the central bank said on Thursday. The decision comes after inflation returned to the bank’s 2 per cent target in May and stayed there in June, despite stubbornly high services inflation.
Announcing the decision, Bank of England governor Andrew Bailey cautioned that the move would not herald a rapid succession of further cuts.
“Inflationary pressures have eased enough that we’ve been able to cut interest rates today,” said Mr Bailey, who was among the policymakers to vote for a cut. “But we need to make sure inflation stays low, and be careful not to cut interest rates too quickly or by too much.”
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Investors now expect the bank to make one or two further reductions in borrowing costs by the end of the year.
Two-year bond yields – which closely track investors’ interest rate expectations – fell 0.12 percentage points to 3.69 per cent, the lowest level in more than a year. Sterling fell to a four-week low of $1.2772, down 0.6 per cent against the dollar on the day.
The cut comes as a boost to chancellor of the exchequer Rachel Reeves as she tries to revive economic growth and tackle what Labour has said is a £22 billion (€26 billion) hole in the public finances.
Ms Reeves, who wants to avoid any sense that the rate cut will lessen the need for “tough choices” including tax rises in her October budget, gave a cautious response to the move.
“While today’s cut in interest rates will be welcome news, millions of families are still facing higher mortgage rates after the ‘mini’ budget,” she said, referring to Liz Truss’s short-lived premiership in 2022.
“That is why this government is taking the difficult decisions now to fix the foundations of our economy after years of low growth, so we can rebuild Britain and make every part of our country better off,” she added.
Ruth Gregory, of Capital Economics, said Thursday’s decision was a “hawkish cut”, given the close vote and Mr Bailey’s cautious message. “It seems likely the MPC wants to see more evidence of waning inflationary pressures before embarking on further rate cuts,” she added.
James Smith, economist at ING, added that the bank appeared “incredibly reticent to let markets run away with the idea that this could be the start of a rapid cutting cycle”. However, he said that one or two further moves could well materialise by the end of the year.
The Bank of England decision is the latest sign of growing confidence among central banks that the post-Covid-19 price jump has been vanquished. Earlier this summer, the European Central Bank was the first major central bank to lower rates. On Wednesday, the Federal Reserve signalled it could cut borrowing costs as soon as September.
Minutes to Thursday’s decision suggest the MPC was deeply divided over the move. Some of those who opted for a cut acknowledged the decision was “finely balanced”.
The BoE’s cut was opposed by rate-setters including the bank’s chief economist Huw Pill, who warned that domestic inflationary pressures remained “more entrenched”. Mr Pill was joined by external members Megan Greene, Jonathan Haskel and Catherine Mann in opposing the rate move.
Mr Bailey, the BoE’s new deputy governor Clare Lombardelli, Sarah Breeden, Dave Ramsden and external member Swati Dhingra all voted for a cut. – Copyright The Financial Times Limited 2024
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