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The Bank of England has cut interest rates for the first time in more than four years in a knife-edge vote that marks a boost to the Labour government’s promise to kick-start economic growth.
The Monetary Policy Committee voted five to four to reduce the bank’s key rate by a quarter of a percentage point to 5 per cent, the BoE said on Thursday.
The decision comes after inflation returned to the bank’s 2 per cent target in May and stayed there in June, despite stubbornly high services inflation.
Announcing the historic decision, BoE governor Andrew Bailey cautioned that the move would not herald a rapid succession of further cuts.
“Inflationary pressures have eased enough that we’ve been able to cut interest rates today,” said Bailey, who was among the policymakers to vote for a cut.
“But we need to make sure inflation stays low, and be careful not to cut interest rates too quickly or by too much,” he added.
Investors now expect the BoE to make one or two further reductions in borrowing costs by the end of the year.
Sterling briefly dropped to a four-week low against the dollar immediately following the announcement before rebounding slightly.
The pound extended earlier losses to 0.8 per cent to $1.276, while interest rate-sensitive two-year gilt yields dropped 0.06 percentage points to 3.76 per cent.
The cut was greeted with relief in the Treasury, where chancellor Rachel Reeves is trying to revive economic growth and tackle what Labour has said is a £22bn hole in the public finances.
Ruth Gregory of Capital Economics said that Thursday’s decision was a “hawkish cut”, given the close vote and Bailey’s cautious message.
“It seems likely the MPC wants to see more evidence of waning inflationary pressures before embarking on further rate cuts,” she added.
The BoE’s decision is the latest sign of growing confidence among central banks that the post-Covid-19 price jump has been vanquished. Earlier this summer, the European Central Bank was the first major central bank to lower rates.
On Wednesday, the Federal Reserve signalled it could cut borrowing costs as soon as September.
The BoE said on Thursday that it expected headline inflation to climb from 2 per cent to 2.7 per cent later this year, before slowing. It added that it expects consumer price inflation to drop to 1.7 per cent by 2026, and then to 1.5 per cent in 2027.
The bank also upgraded its gross domestic product growth forecast for this year to 1.25 per cent from just 0.5 per cent, and expected expansion of 1 per cent in 2025.
Minutes to Thursday’s decision suggest the MPC was deeply divided over the move. Some of those who opted for a cut acknowledged the decision was “finely balanced”.
The BoE’s cut was opposed by rate-setters including the bank’s chief economist Huw Pill, who warned that domestic inflationary pressures remained “more entrenched”.
Despite inflation returning to target in recent months, services inflation has remained high.
Pill was joined by external members Megan Greene, Jonathan Haskel and Catherine Mann in opposing the rate move.
Bailey, the BoE’s new deputy governor Clare Lombardelli, Sarah Breeden, Dave Ramsden and external member Swati Dhingra all voted for a cut.
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