Bank of England cuts interest rates for first time since 2020

August 01, 2024 (MLN): The Bank of England cut interest rates for the first time since early 2020 and signaled further cautious reductions ahead.

The monetary policy committee voted by a majority of 5–4 to reduce the bank rate by 25 basis points, to 5%. Four members preferred to maintain the rate at 5.25%.

Twelve-month CPI inflation was at the MPC’s 2% target in both May and June.

CPI inflation is expected to increase to around 2¾% in the second half of this year, as declines in energy prices last year fall out of the annual comparison, revealing more clearly the prevailing persistence of domestic inflationary pressures, it said in a statement on Thursday.

Private sector regular average weekly earnings growth has fallen to 5.6% in the three months to May, and services consumer price inflation has declined to 5.7% in June.

GDP has picked up quite sharply so far this year, but underlying momentum appears weaker.

The committee’s framework for assessing the medium-term outlook for inflation distinguishes between first and second-round effects.

The MPC has been focused on second-round effects that capture more persistent inflationary pressures, it noted.

It said that the committee continues to monitor the accumulation of evidence from a broad range of indicators.

The committee expects the fall in headline inflation, and normalisation in many indicators of inflation expectations, to continue to feed through to weaker pay and price-setting dynamics, it added.

A margin of slack should emerge in the economy as GDP falls below potential and the labour market eases further, it noted.

Domestic inflationary persistence is expected to fade away over the next few years, owing to the restrictive stance of monetary policy, it said.

However, it noted that 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.

In balancing these considerations, at this meeting, the committee voted to reduce Bank Rate to 5%. It is now appropriate to reduce slightly the degree of policy restrictiveness, it noted.

The impact from past external shocks has abated and there has been some progress in moderating risks of persistence in inflation.

Although GDP has been stronger than expected, the restrictive stance of monetary policy continues to weigh on activity in the real economy, leading to a looser labour market and bearing down on inflationary pressures.

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

The committee continues to monitor closely the risks of inflation persistence and will decide the appropriate degree of monetary policy restrictiveness at each meeting, it further added.

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