The Bank of England has made a significant decision to lower the interest rates by a quarter percentage point to 5%. This decision was reached by the Bank’s nine-member Monetary Policy Committee (MPC) with a narrow majority of five to four votes. This marks the end of the joint-longest plateau for rates since the Bank was granted independence in 1997.
The impact of this decision will be immediately reflected in savings accounts and floating rate mortgages, while fixed rate mortgages had already taken into account the possibility of lower rates. The MPC’s target of a 2% consumer price index rate of inflation was also a factor in the decision to cut interest rates. However, the Bank’s updated forecasts show that inflation is expected to rise in the coming months, reaching around 2.75% by the end of the year.
While many economists anticipate the Bank to continue reducing borrowing costs in the coming months, Governor Andrew Bailey has cautioned against expecting rapid rate cuts like the 14 successive increases that took place between late 2021 and mid-2023. “I would caution against that,” he stated in an interview, citing the lingering effects of global shocks that led to the previous cycle of rate hikes. “We’re dealing with sticky leftovers as it were,” he added, referring to factors such as services inflation and elevated wage growth.
In a press conference, Bailey explained the rationale behind the rate cut, stating, “Inflationary pressures have eased enough that we’ve been able to cut interest rates today. But we need to make sure inflation stays low, and be careful not to cut interest rates too quickly or by too much. Ensuring low and stable inflation is the best thing we can do to support economic growth and the prosperity of the country.”
On the business front, some notable developments include a potential deal for The Spectator by a prominent tycoon, better-than-expected sales reported by Next, and a lawsuit against the firm responsible for a global IT outage. In addition, the Bank has revised its forecast for economic growth this year, increasing it from 0.5% to 1.5%. The Bank expects the economy to grow by 0.7% in the second quarter and 0.4% in the following quarter. However, these forecasts do not take into account any measures announced by the new chancellor, Rachel Reeves.
The MPC members were briefed on Reeves’ recent fiscal announcement, which addressed a “black hole” in the public finances and proposed various measures to address it. One of these measures includes a 5.5% pay increase for public sector workers. While Bank insiders do not anticipate this pay raise to significantly impact inflation, a full audit of the plans will be conducted after the budget in October.
When asked about the potential effect of the wage hike, Governor Bailey stated, “It’s too early, but I would say… that if you do a back-of-the-envelope calculation… you get a very small number for inflation.” He emphasized the importance of waiting to see the full impact of the budget before drawing any conclusions. “That’s the important thing,” he added.
