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 around noon, the nine-member Monetary Policy Committee (MPC) voted 5-4 to cut the base rate by 0.25 percentage points from a 16-year high of 5. 25 percent. Governor Andrew Bailey supported the reduction and raised the rate to 5 percent.
This cut marks an important step in easing the UK’s cost of living. Interest rates had been rising since December 2021 from a record low of 0.1 percent to combat inflation, increasing financial pressure on many families.
The MPC’s decision is expected to lead banks to a reduction in mortgage interest rates in the short term, but will also lead to less attractive savings contracts.
Headline consumer price index inflation has stabilized at the Bank’s 2 percent target over the past two months, the lowest level since July 2021. This stability fueled speculation about a possible monetary policy easing for the first time since March 2020.
The five MPC members who supported the rate cut cited evidence of a labor market rebalancing and slowing wage growth, noting progress in reducing the risks of persistent inflation. Supply chain disruptions following the pandemic and Russia’s invasion of Ukraine had previously pushed British inflation to a four-decade high of 11.1 percent.
Bailey said: “Inflationary pressures have eased enough that we have been able to cut rates today.” However, he cautioned against expecting a rapid decline in borrowing costs, stressing the need for careful management to keep inflation low and stable.
This cautious stance was echoed by the four MPC members who voted to leave interest rates unchanged. They argued that underlying domestic inflationary pressures remained entrenched, indicating that long-term interest rates may need to remain restrictive.
The narrow 5-4 vote signals divisions within the committee over the resilience of inflation and the appropriate pace for cutting interest rates. Before the announcement, investors expected a reduction of about 0.50 to 0.75 percentage points this year.
The MPC is wary that price pressures could persist after energy cost reductions are no longer included in inflation calculations. The Bank expects inflation to rise to 2.75 percent in the second half of this year, as year-on-year declines in energy prices are ignored in annual comparisons.
The committee has consistently pointed out that services inflation, a key measure of domestic price developments, remains elevated at 5.7 percent, alongside high wage growth.
In its latest economic forecasts, the Bank of England significantly upgraded its UK GDP growth projection for this year to 1.25 percent, from a previous estimate of 0.5 percent. This upward revision is expected to strengthen the Labor government’s efforts to boost growth.
In the run-up to the August meeting, it was difficult to identify which MPC members were likely to support a rate cut due to the Bank of England’s communications pause during the general election campaign. MPC members typically express their views on inflation and monetary policy through public speeches.
Ultimately, Governor Bailey, newly appointed Deputy Governor Clare Lombardelli and Sarah Breeden, along with MPC members Dave Ramsden and Swati Dhingra, voted in favor of the rate reduction. Jonathan Haskel, Catherine Mann, Megan Greene and Huw Pill opposed the reduction.
The Labor government is likely to highlight this rate cut as evidence of economic normalization under its leadership. Prime Minister Sir Keir Starmer has repeatedly blamed the Conservatives, and in particular 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 in government spending. Based on an audit by the Ministry of Finance, she canceled infrastructure projects and the winter fuel surcharge for pensioners who did not receive benefits. Reeves also indicated possible tax increases in her upcoming budget on Oct. 30.
The MPC said it would outline the pace of bond sales for the coming year at its next meeting in September.