Interest rates cut for the first time in four years

The Bank of England has cut rates for the first time since 2020, to 5% - with the Monetary Policy Committee (MPC) voting to reduce the policy rate from a 16-year high. This decision came after inflation fell back to the Bank’s 2% target in May and held steady in June. But the vote to cut was narrow: the MPC vote was split 5-4 in favour of a rate cut, with the minority believing that monetary policy needs to remain tight to extinguish ingrained domestic inflationary pressures. The MPC was quick to say this was not the start of a pre-determined series of rate cuts, instead that the Committee would “go from meeting to meeting”.

The vote to cut interest rates was narrow

The Bank of England’s MPC voted to cut interest rates in August, reducing the Bank Rate to 5% (from 5.25%). This marks a first step to unwinding a tightening cycle that began in December 2021: with the MPC hiking rates in 14 consecutive meetings, to help reduce the strongest bout of inflationary pressures seen since the 1970s.

But the decision was a narrow one, with the MPC voting by a majority of just 5-4 to reduce rates. Even some of those members voting to cut acknowledged that the decision was “finely balanced”, with inflationary persistence having not yet conclusively dissipated. But on balance, the bloc voting to cut rates judged that progress had been made in reducing the risks of inflation persistence, and the restrictive stance of monetary policy was weighing on activity.  

While GDP growth had outperformed the Bank’s last forecast in May (0.7%, compared to the projection of 0.4% for Q1) the MPC still expects a degree of slack to open up in the economy over the next few years, reflecting both the continued restrictiveness of monetary policy, and an assumed tightening in fiscal policy. This was also likely another key factor behind today’s rate cut.

Those in the minority (i.e. members that voted to keep rates at 5.25%) put more weight on the potential for domestic inflationary pressures, including the strength in services inflation and wage growth, being more entrenched in the economy, and required greater evidence to suggest that this would not materialise.