The Bank of England has cut interest rates for the first time in more than four years, providing much-needed relief to millions of homeowners and families still struggling with the high cost of living.
In a controversial decision announced at midday, the nine-member Monetary Policy Committee voted 5-4 to cut the base rate by 0.25 percentage points from a 16-year high of 5.25 per cent. Governor Andrew Bailey supported the cut, taking the rate to 5 per cent.
The cut is a significant step in easing the UK’s cost of living crisis. Interest rates have been rising since December 2021, when they rose from a record low of 0.1 per cent to combat inflation, which has intensified financial pressures on many households.
The MPC’s decision is expected to prompt banks to cut mortgage rates soon, although it will also make savings deals less attractive.
The headline CPI inflation rate has held steady at the bank’s 2% target for the past two months, the lowest since July 2021. This stability has fueled speculation about the possibility of easing monetary policy for the first time since March 2020.
The five MPC members who backed a rate cut cited evidence of labour market rebalancing and easing wage growth, pointing to progress in reducing the risk of persistent inflation. Supply chain disruptions following the pandemic and Russia’s invasion of Ukraine have pushed UK inflation to a four-decade high of 11.1 per cent.
“Inflationary pressures have eased enough to enable us to cut interest rates today,” Bailey said. However, he cautioned against expecting a rapid decline in borrowing costs, stressing the need for careful management to maintain low and stable inflation.
This cautious stance was echoed by the four MPC members who voted to keep rates unchanged. They argued that underlying domestic inflationary pressures remain entrenched, suggesting that longer-term interest rates may need to remain restrained.
The narrow 5-4 vote suggests a split within the committee over inflation resilience and the appropriate pace of rate cuts. Before the announcement, investors had expected a cut of about 0.50 to 0.75 percentage points this year.
The MPC fears that price pressures will persist after the central bank stops taking energy cost cuts into its inflation calculations. The bank expects inflation to rise to 2.75% in the second half of this year, excluding the year-on-year decline in energy prices from annual comparisons.
The committee continued to note that inflation in services, a key measure of domestic price trends, remains high at 5.7 percent, alongside rising wage growth.
In its latest economic forecasts, the Bank of England raised its forecast for UK GDP growth this year to 1.25%, up from a previous estimate of 0.5%. The upward revision is expected to boost the Labour government’s efforts to stimulate growth.
In the run-up to the August meeting, identifying MPC members who were likely to support a rate cut was difficult because the Bank of England had stopped communicating during the general election campaign. MPC members usually express their views on inflation and monetary policy through public speeches.
In the end, Governor Bailey and newly appointed Lieutenant Governors Claire Lombardelli and Sarah Breeden joined Monetary Policy Committee members Dave Ramsden and Swati Dhingra in voting in favor of the rate cut. Jonathan Haskell, Katherine Mann, Megan Green and Hugh Bell opposed the cut.
The Labour government is likely to highlight the rate cut as evidence of economic normalisation under its leadership. Prime Minister Sir Keir Starmer has often blamed the Conservatives, and particularly Liz Truss’s mini-budget, for previous rate hikes.
Earlier this week, Chancellor Rachel Reeves accused her predecessor Jeremy Hunt of hiding £21.9 billion of government overspending. Using the Treasury audit, she has scrapped infrastructure projects and a winter fuel allowance for non-benefits pensioners. Reeves has also hinted at possible tax rises in her next budget on October 30.
The Monetary Policy Committee announced that it will set the pace of bond sales for next year at its next meeting in September.