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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 voted five to four to reduce the bank’s key rate by a quarter of a percentage point to 5 per cent, the BoE 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, BoE 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 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,” he added.
Investors now expect the BoE to make one or two further reductions in borrowing costs by the end of the year.
Sterling briefly dropped to a four-week low against the dollar immediately following the announcement before rebounding slightly, trading 0.4 per cent lower on the day at $1.2799.
Interest rate-sensitive two-year gilt yields dropped 0.07 percentage points to 3.74 per cent.
The cut comes as a boost to chancellor Rachel Reeves as she tries to revive economic growth and tackle what Labour has said is a £22bn hole in the public finances.
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 news.
“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 shortlived 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 that Thursday’s decision was a “hawkish cut”, given the close 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,” she added.
James Smith, economist at ING, added that 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 said that one or two further moves could well materialise by the end of the year.
The BoE’s 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.
The BoE said on Thursday that it expected headline inflation to climb from 2 per cent to 2.7 per cent this year, before slowing. It added that it expects consumer price inflation to drop to 1.7 per cent by 2026, and then to 1.5 per cent in 2027.
Katharine Neiss, chief European economist at PGIM Fixed Income, said the BoE’s forecast of a rise in inflation later in the year “suggests a further rate cut may not be on the cards for September”.
But she added that, assuming there are “no fiscal bazookas” in the October Budget, there could be one more rate reduction later in the year.
The BoE also upgraded its gross domestic product growth forecast for this year to 1.25 per cent from just 0.5 per cent, and expected expansion of 1 per cent in 2025.
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”.
Despite inflation returning to target in recent months, services inflation has remained high.
Pill was joined by external members Megan Greene, Jonathan Haskel and Catherine Mann in opposing the rate move.
Bailey, the BoE’s new deputy governor Clare Lombardelli, Sarah Breeden, Dave Ramsden and external member Swati Dhingra all voted for a cut.