Bank Of England Cuts Rate For First Time Since 2020

(RTTNews) - The Bank of England lowered its benchmark rate for the first time since the onset of the coronavirus pandemic as inflation receded and the underlying growth momentum remained weaker.

In a very close call, the Monetary Policy Committee, led by Governor Andrew Bailey, decided to cut the bank rate by a quarter-point to 5.00 percent from 5.25 percent, which was the highest since early 2008.

This was the first reduction in UK interest rates since March 2020.

The MPC voted 5-4 to cut the bank rate. For members supporting the rate cut, the decision was finely balanced. It is now appropriate to reduce slightly the degree of policy restrictiveness, they said.

Among the nine MPC members, other four preferred to maintain the rate at 5.25 percent.

Dissenters said the current level should be maintained as the upside news to services inflation and GDP outturns suggested that second-round effects were having a greater impact on wage and price-setting behavior in the economy.

Policymakers expect inflation to rise to around 2.75 percent in the second half of the year as declines in energy prices last year fell out of the annual comparison. However, inflation is projected to fall back to 1.7 percent in two years' time and to 1.5 percent in three years.

The committee observed that GDP picked up quite sharply so far this year, but underlying momentum remains weaker.

The minutes suggested that the UK central bank will move more cautiously. Governor Bailey said, "We need to be careful not to cut rates too quickly or by too much."

The BoE said, "Monetary policy will need to continue to remain restrictive for sufficiently long until the risks to inflation returning sustainably to the 2 percent target in the medium term have dissipated further."

Capital Economics' economist Ruth Gregory said the next 25 basis point cut will come in November instead of September.

Nonetheless, a fading in services inflation and below-target CPI inflation will prompt the Bank to cut rates to 4.50 percent by the end of this year and 3.00 percent next year, the economist added.