The Bank of England (BOE) has lowered interest rates for the first time since early 2020, a move seen as providing some relief to households after experiencing the highest borrowing costs in the UK for a generation.
Governor Andrew Bailey’s casting vote secured a quarter-point reduction in the benchmark rate to 5%. The decision was described as “finely balanced” by some supporters and opposed by four members of the nine-member Monetary Policy Committee, according to meeting minutes.
Pund Weakends Against Dollar
Following the announcement, the pound weakened against the dollar, and UK bonds saw gains. Sterling traded 0.8% lower at $1.2755, and the yield on 10-year gilts dropped by six basis points.
Traders are now expecting further reductions this year, pricing in around 35 basis points of easing by December.
The minutes did not specify where interest rates might settle or the speed of potential cuts. It indicated that the BOE might lower borrowing costs gradually, with market bets pointing to only one additional reduction this year.
“Inflationary pressures have eased enough that we’ve been able to cut interest rates today,” Bailey said.
“But we need to ensure inflation remains low and avoid cutting rates too quickly or too much.”
The decision is a timely boost for Prime Minister Keir Starmer’s new Labour government and supports arguments that his predecessor, Rishi Sunak, called last month’s election too early.
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The rate cut aligns the BOE with a broader trend of easing across advanced economies, possibly to be joined by the U.S. Federal Reserve, which signaled potential rate cuts in September unless inflation progress stalls.
Despite the cut, the BOE’s forecasts suggest a steeper path of rate reductions over the next three years than markets currently expect.
Assuming rates fall to 4.1% in 2025 and 3.5% in three years, inflation is projected at 1.7% after two years and 1.5% after three, below the 2% target.
“This is a hawkish cut. They are just removing restrictiveness, rather than easing,” said Athanasios Vamvakidis, head of G-10 FX strategy at Bank of America. “I see limited impact on the pound. They are not committing to anything and will go meeting by meeting, remaining data dependent.”
While UK consumer price growth has reached the desired level, underlying pressures remain high. The BOE predicted headline inflation would rebound to 2.7% by the end of the year, contingent on wage and services price developments.
Inflation risks remain “skewed to the upside throughout the forecast period,” the BOE noted, indicating that monetary policy would need to stay restrictive until risks to inflation falling below the 2% target had dissipated.
The committee’s decision to cut rates was despite persistent underlying inflation and stronger-than-expected growth, cited by those opposing the move.
The UK economy is rebounding from recession more robustly than anticipated. The BOE upgraded its growth forecast for this year to 1.25% from 0.5%, while projections for 2025 and 2026 remain unchanged at 1% and 1.25%.
