U.K News
UK Interest Rates Cut a Quarter Percentage By the Bank of England
UK interest rates have been cut by The Bank of England for the first time in more than four years, a knife-edge vote that strengthens the Labour government’s commitment to jump-start economic recovery.
The Monetary Policy Committee voted five to four to lower the bank’s main rate by a quarter percentage point to 5%, the Bank of England announced on Thursday.
The decision to cut UK interest rates comes after inflation returned to the bank’s target of 2% in May and remained there in June, despite persistently high services inflation.
Andrew Bailey, governor of the Bank of England, warned that the decision would not pave the way for a quick succession of additional cutbacks.
“Inflationary pressures have eased enough that we’ve been able to lower interest rates today,” said Bailey, one of the officials who voted in favour of the drop.
“But we need to make sure inflation stays low, and be careful not to cut interest rates too quickly or by too much,” he advised.
According to the Financial Times, investors now expect the BoE to cut borrowing prices one or two more times before the end of the year.
UK Interest Rates and the Deficit
Two-year bond rates, which closely reflect investors’ interest rate forecasts, plummeted 0.12 percentage points to 3.69 percent, their lowest level in over a year. Sterling plummeted to a four-week low of $1.2772, down 0.6% against the dollar on the day.
The cut is a gain for chancellor Rachel Reeves as she attempts to revive economic development and address what Labour claims is a £22 billion deficit in the public finances.
Reeves, who wants to avoid giving the impression that the rate decrease will reduce the need for “tough choices” such as tax increases in her October Budget, responded cautiously to the move.
“While today’s interest rate cut will be welcome news, millions of families will still face higher mortgage rates following Liz Truss’s brief premiership in 2022,” she stated.
“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,” according to her.
Ruth Gregory of Capital Economics described Thursday’s decision as a “hawkish cut” given the narrow vote and Bailey’s cautious message.
“It seems likely the MPC wants to see more evidence of waning inflationary pressures before embarking on further rate cuts,” according to her.
According to James Smith, economist at ING, the BoE appeared “incredibly reticent to let markets run away with the idea that this could be the start of a rapid cutting cycle”.
However, he stated that one or two other movements could occur by the end of the year.
Following European Bank
The Bank of England’s decision is the latest indication that central banks are increasingly confident that the post-Covid-19 price surge has been overcome. Earlier this summer, the European Central Bank became the first major central bank to cut rates.
On Wednesday, the Federal Reserve indicated that borrowing costs could be slashed as early as September.
On Thursday, the BoE predicted that headline inflation would rise from 2% to 2.7% this year before declining. It also stated that it anticipates consumer price inflation to fall to 1.7% by 2026, then to 1.5% in 2027.
The Bank of England also raised its prediction for GDP growth this year to 1.25 percent from 0.5%, with a 1% expansion predicted in 2025.
Minutes from Thursday’s decision show that the MPC was profoundly divided on the move. Some of those who chose to cut admitted that the decision was “finely balanced”.
Rate-setters, including the bank’s chief economist Huw Pill, rejected the drop, warning that domestic inflationary pressures were “more entrenched”.
Pill, along with external members Megan Greene, Jonathan Haskel, and Catherine Mann, spoke out against the rate increase.
Bailey, the BoE’s new deputy governor Clare Lombardelli, Sarah Breeden, Dave Ramsden, and external member Swati Dhingra all supported the cut.
