The Bank of England, Monetary Policy Committee (MPC), has voted 5 to 4 to cut the benchmark Bank Rate by 0.25% to 5%. The disennters preferred to hold rates steady for now.
The decision to cut rates follows the decision by the US Federal Reserve to hold rates steady while talking up the potential for a rate cut as soon as September.
Just like the US, the Bank of England has a target rate of inflation of 2%. The MPC said that CIP in both May and June held at 2% while expectations are for inflation to increase to 2.75 during the back end of the year.
GDP has increased by 0.7% in 2024 Q1, and indications appear to show this growth has continued into Q2.
The MPC stated that while “there is a risk that inflationary pressures from second-round effects will prove more enduring in the medium term. A stronger-than-expected path for demand, and structural factors such as a higher equilibrium rate of unemployment, could affect domestic wage and price-setting more persistently. Furthermore, the degree of restrictiveness of monetary policy could be less than embodied in the Committee’s current assessment.”
Nikos Tzabouras, Senior Financial Editorial Writer at Tradu, commented on the decision to cut rates by 25 basis points.
“BoE slashed rates for the first time in four years as price pressures have abated. This is a watershed moment, but further cuts may prove hard to come by. Officials are divided as the 5-4 vote split showed, expect inflation to pick up again in Q2 and warned that policy needs to remain restrictive. On the other hand, the economy remains fragile and high rates sustain risk of a mortgage crisis, creating pressure for monetary easing.”
Douglas Grant, Group CEO of Manx Financial Group, called the decision by the Bank welcome news for consumers and businesses, providing a lifeline to struggling firms.
“We would hope the news will help stimulate economic activity and boost consumer confidence,” said Grant. “Despite the positive news, the broader economic context in the UK remains uncertain, and SMEs should capitalise on the rate cut as an opportunity to reevaluate their current lending arrangements and strengthen their positions. In parallel, to maximise the positive impact of rate cuts on SMEs, it would be great to see policymakers consider complementary measures such as a permanent government-backed loan scheme, tailored to resilient sectors and involving both traditional and non-traditional lenders. Such a permanent scheme has the potential to play a pivotal role in unlocking economic resurgence for numerous companies, thereby sustaining the overall economy.”