The Bank of England has slashed its base interest rate for the first time in over four years. The central bank's Monetary Policy Committee (MPC) voted narrowly to reduce the rate from 5.25% to 5%. This decision, announced on August 1, 2024, marks a significant shift in the bank's monetary policy.
For those who may be wondering, when was the last Bank of England rate cut? The last time the Bank of England reduced interest rates was in March 2020, at the onset of the COVID-19 pandemic.
Back then, the rate was slashed to a historic low of 0.1% to support the economy through the unprecedented crisis. This recent cut, therefore, ends a period of over four years without any reduction, during which rates had climbed to curb rising inflation.
Inflation and Economic Growth
The Bank of England's decision comes at a time when inflationary pressures have relaxed, therefore granting more monetary policy flexibility. Although inflation has stabilized, Governor Andrew Bailey stressed that the bank has to make sure it stays low without drastically lowering rates too soon or too fast. "We have to make sure inflation stays low and be careful not to cut interest rates too quickly or by too much." Bailey added.
The UK economy has battled to recover its pre-pandemic growth trajectory, lagging behind the US and the eurozone. The Bank of England wants to boost economic activity and assist homeowners struggling with excessive mortgage payments with the interest rate drop.
Effects on Borrowers and Homeowners
With variable-rate mortgages, the rate reduction should help homeowners alleviate their financial burden. Those on tracker mortgages would typically see payments cut by more than £340 a year. Furthermore, some 700,000 fixed-rate mortgage deals slated to expire in the later half of the year could profit from reduced rates provided by lenders.
However, Governor Bailey stressed that the cut wouldn't cause borrowing rates to drop quickly. "Homeowners should not expect borrowing costs to drop rapidly in the coming months." he warned.
Public Reactions
Many mortgage holders have been worried about the choice to lower rates during a period of increasing borrowing costs. Commenting on the public sector wage increases of the incoming government, former Prime Minister Rishi Sunak expressed concern about the counter-effects of the rate reduction. "My concern now is that Labour's inflation-busting public sector pay rises have put further cuts at risk," Sunak said.
Chancellor Rachel Reeves, on the other hand, praised the rate cut and emphasized the assistance it will provide for households still struggling with high mortgage rates following the Liz Truss 2022 mini-budget. "Millions of people are still paying higher mortgage rates, but this cut will provide some much-needed relief." Reeves said.
Future Economic Predictions
Economists are divided on the future trajectory of interest rates. While some forecast another decrease in November, others believe rates will stay the same at the next MPC meeting in September.
Senior economist Carsten Jung of the IPPR think tank attacked the delay in the rate reduction, implying it had hampered economic recovery. "The Bank of England was right to cut interest rates today, but it has waited too long to do so." Jung stated. To help economic development, he underlined the need for the Bank to signal continuous rate cuts.
The Bank of England must delicately balance the labor market cooling and inflation expectations reverting to pre-pandemic levels. Although the latest rate reduction will help relieve financial strains on people and companies, its effects will rely on later policy choices and the more general state of the economy.