The Bank of England has cut interest rates for the first time since the start of the Covid pandemic, moving to ease the pressure on households after ratcheting up borrowing costs to combat the worst inflation shock in four decades.
In a finely balanced decision after holding borrowing costs at the highest level since the 2008 financial crisis for a year, the Bank’s monetary policy committee (MPC) voted by a narrow majority to cut its base rate by a quarter of a percentage point to 5%.
Exposing divisions within the central bank’s most senior ranks over the timing of a cut, the MPC was split by five votes to four, with the governor, Andrew Bailey, casting the deciding vote for the first reduction in borrowing costs since March 2020.
With headline inflation holding at the Bank’s 2% target for a second consecutive month in June, financial markets had expected a cut in rates, although City economists had predicted it would be a close call amid fears over stubbornly high inflation becoming entrenched. The pound fell against the US dollar and euro after interest rates were cut to 5%.
Bailey said inflationary pressures had “eased enough” to enable the first reduction in borrowing costs since the Bank stopped ramping up interest rates this time last year – the joint longest period that rates have been held after a hiking cycle since the turn of the millennium.
However, Bailey said savers and borrowers should not expect large reductions over the coming months amid concerns about lingering risks to the economy. “We need to make sure inflation stays low, and be careful not to cut interest rates too quickly or by too much,” he said.
“Ensuring low and stable inflation is the best thing we can do to support economic growth and the prosperity of the country.”
Threadneedle Street beginning to ease the pressure on households amid the cost of living crisis comes after a sharp fall in inflation this year and will be a welcome step for the new Labour government as Keir Starmer aims to revive flatlining living standards and a stagnating economy.
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It will also be seized on by Rishi Sunak and Jeremy Hunt, the Conservative leader and shadow chancellor, as evidence their government had been making progress on the economy, albeit too late to benefit Sunak’s bet that falling inflation could strengthen his hand in a snap general election.