Interest rates have been cut after being held at a 16-year high for the past year. The decision to hold rates at 5.25% during each of the past seven updates was closely contested. However, the Monetary Policy Committee (MPC) has now voted by a narrow margin of 5 to 4 to lower the bank rate to 5%.
The Bank of England (BoE) stated that those in favour of the rate cut felt it was “appropriate to reduce slightly the degree of policy restrictiveness.” They noted that the effects of past external shocks had lessened, and there had been some progress in reducing the risk of persistent inflation. In addition, the recent increase in services inflation was partly due to more volatile components within that category.
While GDP growth had been stronger than anticipated, the BoE acknowledged that the restrictive monetary policy was impacting real economic activity, resulting in a looser labour market and easing inflationary pressures. This admission suggests that the higher rate was not delivering significant benefits. For some of the five members who supported the cut, the decision was “finely balanced.”
The BoE also highlighted that 12-month CPI inflation had returned to the MPC’s 2% target in May and June. However, CPI inflation is expected to rise to around 2¾% in the latter half of the year as the previous year’s energy price declines drop out of the annual comparison, revealing more clearly the underlying domestic inflationary pressures.
Among the four members who preferred to keep the rate at 5.25%, there was concern about the upward trends in services inflation and GDP outcomes compared to the May report. They also pointed to continued elevated wage growth, suggesting that “second-round effects were having a greater impact on wage and price-setting behaviour in the economy beyond what was embodied in the modal forecast.”
Author
Gill Laing is a qualified Legal Researcher & Analyst with niche specialisms in Law, Tax, Human Resources, Immigration & Employment Law.
Gill is a Multiple Business Owner and the Managing Director of Prof Services Limited - a Marketing & Content Agency for the Professional Services Sector.
