In a closely contested decision, the Bank of England has reduced interest rates for the first time in over four years, responding to slower inflation. The central bank lowered rates by a quarter of a percentage point to 5 percent on Thursday, marking the first rate cut since March 2020, when the pandemic severely impacted the economy.
This move signals the end of the Bank’s vigorous efforts to combat high inflation, which had surged to double digits less than two years ago. The decision is expected to relieve mortgage holders and business owners who have faced increased borrowing costs. For the past year, interest rates were maintained at 5.25 percent, the highest since 2008.
However, policymakers cautioned that interest rates would be reduced gradually to maintain a restrictive policy stance. “We need to make sure inflation stays low and be careful not to cut interest rates too quickly or by too much,” stated Andrew Bailey, the Bank’s governor.
The decision was narrowly passed, with five of the nine-member rate-setting committee, including Bailey, voting in favor of the cut. They argued that inflation, which stood at 2 percent in June, had decreased sufficiently to justify easing policy. Nonetheless, several members indicated that the risk of persistent inflationary pressures had not “conclusively dissipated,” according to the policy meeting minutes.
The remaining four committee members preferred to wait for more evidence of subsiding inflationary pressures before reducing rates. This split decision highlights the uncertainty regarding domestic price pressures’ strength.
Despite inflation falling to the Bank’s 2 percent target, there are concerns about stubborn price pressures, especially from higher wages and the services sector, potentially pushing inflation back above the target.
Other major central banks face similar challenges. The European Central Bank cut rates in June but paused at the next meeting, adopting a cautious approach. The Federal Reserve held rates steady on Wednesday but indicated potential rate cuts next month if data shows continued cooling inflation.
In Britain, inflation is expected to fluctuate. The Bank forecasts inflation to rise to about 2.7 percent later this year as lower energy prices’ effects diminish. It anticipates inflation to slow again in the second half of 2025 and fall below the 2 percent target in 2026.
Policymakers are monitoring components of inflation that remain high. Wage growth was at an annual rate of 5.6 percent, and services inflation, influenced heavily by labor costs, was at 5.7 percent in June. Officials are examining whether high prices in this sector are due to short-term volatility or more persistent factors.
The Bank also raised its economic growth forecast for this year to 1.25 percent from 0.5 percent, following stronger-than-expected growth data early in the year.
This rate decision follows the recent election in Britain, which saw the Labour Party come to power. The new government has announced significant reforms to boost economic growth, including establishing a national wealth fund and changing development planning to ease home building. Chancellor of the Exchequer Rachel Reeves plans to cut some spending due to a £22 billion budget shortfall and warned of further spending cuts and tax increases in October.
The Bank of England noted that it had been briefed by the government on these recent announcements, but they were too late to be included in their economic forecasts.
