LONDON, Aug 02 (V7N) — The Bank of England (BoE) has announced a reduction in its benchmark interest rate to 5%, marking its first rate cut in four years. The decision, made on Wednesday, was passed by a narrow 5-4 majority among the BoE’s Monetary Policy Committee (MPC) members. The minority favored maintaining the rate at 5.25%.
This rate cut follows recent declines in consumer price inflation, which hit the BoE’s 2% target in both May and June. However, the BoE anticipates inflation to rise to approximately 2.7% in the latter half of the year.
In its statement, the BoE noted that the reduction reflects a diminished impact from previous external shocks and progress in controlling inflation risks. "The Committee expects ongoing normalization in inflation indicators to lead to weaker pay and price-setting dynamics," the statement read.
Since December 2021, the BoE has enacted 14 consecutive rate hikes, raising the rate from a historic low of 0.1% to a 16-year high of 5.25%. This sharp increase in borrowing costs has placed significant pressure on UK households and businesses.
David Bharier, head of research at the British Chambers of Commerce, welcomed the rate cut, stating it provides much-needed relief for smaller firms and could stimulate investment. “A cautious approach from the Bank will help support business confidence, which has been improving recently,” Bharier noted.
Despite the cut, the BoE emphasized a measured approach to future reductions. "We will not reduce rates too quickly, as some prices, particularly services, are still rising rapidly," the bank cautioned.
Looking ahead, economists expect one or two additional rate cuts by the end of the year, contingent on improvements in services inflation and wage growth, according to ING THINK's James Smith. The MPC will continue to review economic data closely and adjust policy as needed.
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