In a pivotal move aimed at alleviating the financial burden on households, the Bank of England’s Monetary Policy Committee (MPC) has decided to cut the base interest rate to 5%, the first reduction since 2020. This decision, resulting from a narrowly split vote of 5-4 among MPC members, reduces the rate from a 16-year high of 5.25%.
The Governor of the Bank of England, Andrew Bailey, aligned with the majority, supporting the reduction, which provides a significant relief amidst the ongoing cost of living crisis in the UK. The interest rates had been on an upward trajectory since December 2021, rising from a historic low of 0.1% as a measure to curb inflation. Increasing rates had exerted considerable financial pressure on many families.
The recent adjustment is expected to prompt banks to lower mortgage rates, thereby easing some of the financial burdens on homeowners. However, this move may also render savings less attractive. Over the past two months, headline consumer price index inflation has stabilised at the Bank’s 2% target, marking the lowest level since July 2021. This stability has fueled speculation about an easing in monetary policy.
Those MPC members who advocated for the rate cut cited observable rebalancing in the labour market and moderating wage growth, highlighting progress in mitigating risks of persistent inflation. Previous inflation spikes were largely driven by post-pandemic supply chain disruptions and geopolitical tensions, including Russia’s invasion of Ukraine. Bailey remarked, “Inflationary pressures have eased enough that we’ve been able to cut interest rates today.” Nevertheless, he advised caution, urging a conscientious approach to maintaining low and stable inflation.
Conversely, the four MPC members who opposed the decision affirmed that underlying domestic inflationary pressures remain substantial. They suggested that long-term interest rates might need to stay restrictive to sustain economic stability. The narrow margin of the vote underscores the MPC’s internal disagreement regarding the resilience of inflation and the pace at which interest rates should be reduced.
Ahead of the announcement, market expectations had fluctuated, with investors predicting a reduction between 0.50 and 0.75 percentage points within the year. The Bank has projected a rise in inflation to 2.75% in the latter half of 2024, as the deflationary impact of lower energy costs is excluded from year-on-year calculations. Additionally, the Bank has emphasised that services inflation, a critical indicator of domestic price trends, remains high at 5.7%, coupled with elevated wage growth.
In its latest forecasts, the Bank of England significantly upgraded its UK GDP growth projection for 2024 to 1.25%, up from the previously estimated 0.5%. This positive revision is anticipated to support the Labour government’s initiatives to stimulate economic growth. The identification of MPC members likely to favour a rate cut had been challenging due to a communication hiatus during the general election campaign. Traditionally, MPC members publicly express their views on inflation and monetary policy through speeches. Ultimately, Governor Bailey, newly appointed Deputy Governor Clare Lombardelli, and MPC members Dave Ramsden and Swati Dhingra aligned in favour of the rate reduction, while Jonathan Haskel, Catherine Mann, Megan Greene, and Huw Pill dissented.
The Labour government is expected to leverage this rate cut as a testament to economic stabilisation under its administration. Prime Minister Sir Keir Starmer has consistently criticised previous Conservative policies for exacerbating interest rate hikes. Earlier, Chancellor Rachel Reeves accused her predecessor of concealing substantial government overspending, resulting in the cancellation of infrastructure projects and adjustments to the winter fuel allowance.
The MPC’s decision to reduce the base interest rate to 5% represents a crucial intervention aimed at easing financial pressures on UK households and stimulating economic growth. However, the narrow vote margin reflects ongoing concerns about inflation stability, emphasising the need for a balanced and cautious approach moving forward.
