LONDON — The Bank of England has lowered its primary interest rate for the third time within a span of six months, as the British economy continues to show signs of sluggishness and a lack of substantial growth.
In an announcement made on Thursday, the Bank’s Monetary Policy Committee—which comprises nine members—decided to reduce the main interest rate by a quarter of a percentage point, bringing it down to 4.50%. This figure marks the lowest the rate has been since mid-2023. Among the members, seven supported this rate cut, while two others advocated for a more significant reduction of half a percentage point, proposing it be set at 4.25%.
The base interest rate is a crucial factor influencing the cost of mortgages and loans for consumers, as well as affecting the interest rates provided by banks on savings accounts.
This most recent interest rate reduction stems from overarching concerns regarding the UK’s economic outlook, which has shown minimal growth over the preceding six months. The Bank of England has revised its economic growth forecast for the upcoming period, cutting it to 0.75% in recent estimates.
“It will be welcome news to many that we have been able to cut interest rates again today,” remarked Bank Governor Andrew Bailey. He emphasized that the institution will keep a close watch on both the UK economy and global developments, advocating for a cautious and gradual strategy for any future rate adjustments. Bailey highlighted the significance of maintaining low and stable inflation as essential for a prosperous economy, reaffirming the Bank’s commitment to this goal.
The committee’s responsibility includes achieving a consumer price index (CPI) inflation target of 2% within the next couple of years.
Currently, inflation stands at 2.5% and is expected to rise in the near future, in part due to business tax increases implemented by the new Labour government. However, many economists predict it will trend downwards back towards the target, thus justifying the committee’s decision to reduce rates.
Recent official data revealed an unexpected dip in the inflation rate, which fell to 2.5% for the year ending December, mainly due to a decrease in price pressures within the services sector—an area that represents approximately 80% of the UK economy.
Another rationale for reducing borrowing rates is the stagnation in economic growth within the UK, a situation likely to apply further downward pressure on inflation.
Inflation has significantly decreased compared to the peaks observed in previous years. This drop can be attributed in part to central banks raising borrowing costs substantially from nearly zero during the COVID-19 pandemic. Following this, prices experienced an upward surge, initially due to supply chain disruptions and later exacerbated by Russia’s invasion of Ukraine, which resulted in elevated energy prices.
As inflation rates have retracted from their multi-decade highs, central banks, including the Federal Reserve in the United States, have begun lowering interest rates. Nevertheless, very few economists expect rates to revert to the exceptionally low levels seen following the 2008-2009 global financial crisis or during the pandemic.
