Bank of England Cuts Interest Rates for First Time Since 2020
The Bank of England decided, by a slim margin among its policymakers, to cut interest rates on Thursday for the first time in more than four years amid slower inflation.
Britain’s central bank lowered rates a quarter of a percentage point to 5 percent, the first rate cut since March 2020, when the coronavirus pandemic shut down large parts of the economy. The rate cut brings an end to the most aggressive efforts of the central bank to stamp out high inflation, which reached double digits less than two years ago.
The decision is likely to bring some relief to mortgage holders and business owners who have been stung by the rising cost of borrowing. For the past year, interest rates were held at 5.25 percent, the highest level since 2008.
But policymakers warned that it was a “finely balanced decision” and that going forward interest rates would be lowered slowly, which would keep their policy stance restrictive for a while.
“We need to put the period of high inflation firmly behind us,” Andrew Bailey, the bank’s governor, said in a news conference. “And we need to be careful not to cut rates too much or too quickly.”
The central bank’s decision was close. Five members of its nine-person rate-setting committee, including Mr. Bailey, voted to lower rates. They argued that inflation, which was at 2 percent in June, had abated enough to begin easing policy. But several of them said the risks of persistent inflationary pressures had not “conclusively dissipated,” according to the minutes of this week’s policy meeting.
The other four members said they would have preferred to wait for more evidence that inflationary pressures had subsided before cutting rates. The split decision reflects the uncertainty about the strength of domestic price pressures.
Despite inflation’s falling to the central bank’s 2 percent target, policymakers have been concerned that stubborn price pressures, specifically from higher wages and the services sector, which includes categories like hospitality and culture, would push the inflation rate back above their target and hold it there.
Several major central banks have been grappling with the same problem. On the one hand, officials have warned that premature rate cuts would make it even harder to sustainably return inflation to 2 percent. At the same time, they have not wanted to keep interest rates high for longer than necessary and cause undue economic damage.
The European Central Bank cut rates in June but then paused at its next meeting, emphasizing its cautious approach to easing policy. The Federal Reserve held rates steady on Wednesday but said it could begin lowering them next month if data continued to suggest inflation was cooling.
In Britain, the path of inflation is expected to be bumpy. The bank forecast inflation to rise to about 2.7 percent this year as the effect of lower energy prices no longer pulls down the overall inflation rate. The bank expects inflation to start slowing again in the second half of 2025 and then drop below the 2 percent target in 2026.
Policymakers have been closely watching some components of inflation that have remained uncomfortably high. Wage growth was running at an annual rate of 5.6 percent and services inflation, which is heavily influenced by labor costs, was at 5.7 percent in June. Officials have been trying to untangle whether prices are high in this sector because of short-term volatility, such as higher hotel prices, or more persistent factors.
Mr. Bailey said the committee would remain “highly alert” to the risk of inflation’s becoming more persistent.
“I’m not giving you any view on the path of rates to come,” he said. At each meeting, policymakers will decide whether to move rates depending, in part, on whether the economy and inflation are evolving as they expect.
Investors are betting there is about a three-quarters chance that the bank cuts rates again in November, according to trading in financial markets.
The central bank also raised its forecast for economic growth this year to 1.25 percent, from 0.5 percent a few months ago, after data showed the economy grew more strongly than expected in the beginning of the year.
The rate decision is the first since the general election in Britain, which put the Labour Party in power. Over the past few weeks, the new government has announced sweeping changes to raise economic growth, including starting a national wealth fund and changing the development planning system to make it easier to build homes. The chancellor of the Exchequer, Rachel Reeves, also said she was planning to cut some spending because of a shortfall of 22 billion pounds ($28 billion) in the budget this year, and warned that there would be more spending cuts and tax increases in October.
The Bank of England said it was briefed by the government on its recent announcements, but they came too late to be factored into its economic forecasts.
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