LONDON — The Bank of England has implemented its third interest rate reduction in the last six months as the British economy continues to struggle with minimal growth.
On Thursday, the nine-member Monetary Policy Committee announced a reduction of the main interest rate by a quarter percentage point, bringing it down to 4.50%. This is the lowest rate since mid-2023.
The base rate plays a significant role in determining the cost of mortgages and loans for individuals, as well as influencing the interest rates that banks provide on savings accounts.
The decision to cut rates underscores concerns about the future of the British economy, which has seen very little growth over the past half-year.
In related news, market expectations were strong for yet another interest rate cut despite inflation remaining above targeted levels.
Economists widely anticipated a decrease in the interest rate to 4.50% during the Monetary Policy Committee meeting. This would be the committee’s third such action in just six months, signaling a shift in strategy given the weak economic performance.
The base rate adjustment will not only affect loan costs but will also impact how much customers earn on their savings.
Market participants are particularly focused on the economic forecasts that accompany this decision, as well as the perspective presented by Governor Andrew Bailey in the subsequent press conference.
Andrew Wishart, a senior U.K. economist at Berenberg Bank, noted that the bank had previously cut rates at alternate meetings. He stated that the stagnating economy and reduced employment rates are compelling factors pushing for more immediate interventions.
The rate-setting committee’s primary responsibility is to ensure that inflation, as measured by the consumer price index, averages around 2% in the coming years.
Although inflation currently sits at 2.5% and is projected to rise in the near future—partly due to new business tax hikes from the incoming Labour government—many economists believe that it will eventually trend down towards the 2% target, allowing for rate reductions.
Recently released official statistics indicated an unexpected drop in the inflation rate to 2.5% for the year ending in December. This decline was primarily attributed to reduced price pressures within the services sector, which comprises approximately 80% of the U.K. economy.
Additionally, the stagnant economic growth in the U.K. may exert downward pressure on inflation, further supporting the case for lower borrowing rates.
Overall, inflation has significantly decreased from the highs seen in previous years, partially due to central banks worldwide raising borrowing costs from nearly zero during the coronavirus pandemic. Increases in prices initially arose from supply chain disruptions, but escalated further due to geopolitical tensions, particularly Russia’s invasion of Ukraine, which elevated energy costs.
While inflation rates have dropped from decades-long peaks, many central banks, including the U.S. Federal Reserve, have begun to reduce interest rates. However, few analysts expect that rates will return to the exceptionally low levels experienced in the aftermath of the global financial crisis of 2008-2009 or during the pandemic.