FX.co ★ Bank Of England Cuts Rate For First Time Since 2020

The Bank of England has reduced its benchmark interest rate for the first time since the beginning of the COVID-19 pandemic, citing decreased inflation and continued weak growth momentum.

In a closely contested decision, the Monetary Policy Committee (MPC), under the leadership of Governor Andrew Bailey, opted to lower the bank rate by 0.25 percentage points, bringing it down to 5.00 percent from the previous 5.25 percent. This previous rate had been the highest since early 2008.

This move marks the inaugural rate reduction in the UK since March 2020. The MPC's decision was split with a narrow 5-4 vote in favor of the cut. Proponents of the reduction argued that it was now appropriate to slightly decrease the degree of policy restrictiveness.

Among the nine committee members, four dissented, preferring to keep the rate at 5.25 percent. These members argued that the ongoing rise in services inflation and recent GDP outcomes suggested second-round effects were increasingly influencing wage and pricing behaviors in the economy.

Policymakers anticipate that inflation will rise to approximately 2.75 percent in the latter half of the year due to last year's declines in energy prices no longer impacting annual comparisons. However, they expect inflation to recede to 1.7 percent in two years and to 1.5 percent in three years.

The committee noted that, although GDP growth has been robust thus far this year, underlying momentum remains weak.

Minutes from the meeting indicate a cautious approach from the UK central bank moving forward. Governor Bailey emphasized the need for careful deliberation, stating, "We need to be careful not to cut rates too quickly or by too much."

The BoE asserted, "Monetary policy will need to remain sufficiently restrictive for as long as necessary until the risks of inflation not sustainably returning to the 2 percent target in the medium term have further dissipated."

Ruth Gregory, an economist at Capital Economics, predicts that the next 25 basis point cut will occur in November rather than September. She also noted that an easing in services inflation and Consumer Price Index (CPI) inflation falling below target will likely prompt the Bank to reduce rates to 4.50 percent by the end of this year and to 3.00 percent next year.