The Bank of England (BoE) has voted to cut its benchmark interest rate to five percent, the United Kingdom's (UK) central bank said in a statement on Thursday.
At a meeting on Wednesday, the BoE's Monetary Policy Committee (MPC) voted by a majority of 5-4 to reduce the interest rate by 0.25 percentage point, to 5 percent. Four members preferred to maintain the rate at 5.25 percent.
This is BoE's first rate cut in four years as the UK's consumer price inflation has achieved the bank's two-percent target in both May and June. The BoE expected inflation to increase to around 2.7 percent in the second half of this year.
"The Committee expects the fall in headline inflation, and normalization in many indicators of inflation expectations, to continue to feed through to weaker pay and price-setting dynamics," the statement said. The MPC said now it is "appropriate to reduce slightly the degree of policy restrictiveness," as the impact from past external shocks has diminished and there has been some progress in moderating risks of inflation persistence.
To battle against the UK's soaring inflation in the past few years, the BoE has carried out 14 consecutive rate hikes from a record low of 0.1 percent in December 2021 to a 16-year-high of 5.25 percent. The UK households and businesses have been under huge pressure from a sharp rise in borrowing costs since then. "Today's decision by the Bank to cut the interest rate gives many smaller firms welcome breathing space and could trigger an increase in investment as borrowing costs decline," said David Bharier, head of research at the British Chambers of Commerce. "A cautious and well-communicated approach from the Bank will support business confidence, which has been steadily increasing in recent months," Bharier noted.
But the bank on Thursday stressed that it will not cut rates too much or too quickly, warning that prices of some items, including services, are still rising quickly.
"At the start of this year, demand for goods and services in the economy has been stronger than we expected," it added.
The MPC will keep monitoring the data closely and decide the appropriate degree of monetary policy restrictiveness at each meeting, the statement said.
Economists are now anticipating one or two more rate cuts by the end of the year. "We suspect the data on services inflation and wage growth will improve as the year goes on, making the committee more comfortable with proceeding with at least one more cut this year," said James Smith, developed markets economist from ING THINK.
