First decrease since 2020 eases pressure on businesses a month after Keir Starmer became prime minister.
The Bank of England cut its key interest rate for the first time in more than four years, saying the U.K. economy has cooled enough to justify a modest relaxation of monetary policy.
The Bank’s Monetary Policy Committee voted 5-4 in favor of cutting the Bank Rate by 0.25 of a percentage point to 5 percent. It had stood at 5.25 percent for a full year.
“Inflationary pressures have eased enough that we’ve been able to cut interest rates today,” Governor Andrew Bailey said in a statement. “But we need to make sure inflation stays low, and be careful not to cut interest rates too quickly or by too much.”
At first glance, the decision is at odds with much recent economic data. The U.K. economy performed much better than expected in the first half of the year, growing at an estimated 0.7 percent in both of the first two quarters.
Overall, the Bank expects annual growth to accelerate to 1.5 percent in the current quarter, a full percentage point more than it thought likely only three months ago.
However, “underlying momentum appears weaker,” the Bank said in a quarterly policy report, citing the evidence of various business surveys and a steady cooling in the U.K.’s labor market, where wage growth has gradually slowed in recent months as hiring has eased.
Brighter inflation view
Over the next year, it expects growth to slow to 0.8 percent, before accelerating to 1.4 percent and 1.7 percent in the two years after that, on the assumption that the effects of its past rate hikes have now largely played out.At the same time, the Bank’s view on inflation has brightened. While it expects headline inflation to rebound to 2.75 percent by the end of 2024 as past swings in energy prices pass out of the annual comparison, it shaved its forecasts for the next two years.
Its latest estimates indicate that inflation could be around 1.5 percent by the third quarter of 2027, well below its 2 percent target.That is in part because the Bank now expects the pound to be around 2 percent stronger over the whole of its three-year forecast horizon, helping to keep a lid on prices for key imports. The Bank’s new forecasts are based on the prevailing market assumption that the key rate declines to 3.25 percent over the next three years. The Bank said the risks to its forecasts, both for growth and inflation, were skewed to the upside, in a nod to the fact that nearly half the MPC — including chief economist Huw Pill — is unconvinced by the slowdown in wage growth and in services inflation in particular.Prices for services, which are mainly the result of domestic factors, were still growing at a rate of 5.7 percent in June.
Budget in October
The Bank acknowledged the risk that the “neutral” interest rate for the economy may have risen since the pandemic, meaning that its past rate hikes have not done as much to squash inflation as it hoped.
The first fiscal statement by new Chancellor of the Exchequer Rachel Reeves came too late to be included in the MPC’s calculations at this week’s meeting, but the budget she has announced for late October will inform the MPC’s next forecast round in November.
Reeves herself said the cut was “welcome news” but used it as a pretext to take another swipe at the financial legacy left by the outgoing government. Her predecessor, Jeremy Hunt, said it showed that Labour had inherited “a stronger economy that was on the right track.”The shift in the Bank’s thinking was a top-down affair, with Bailey and all of his deputy governors — including Clare Lombardelli, the new deputy for monetary policy — voting for a cut. By contrast, Pill and three external members — Catherine Mann, Jonathan Haskel and Megan Greene — all voted for no change.
Financial markets had largely expected the move, although there remained questions about whether the Bank would err on the side of caution for another month. For some in the financial markets, expectations seemed suspiciously well-founded. The pound, which normally keeps to very narrow ranges while waiting for the MPC decision, sold off by around 1 percent against the dollar from 8 a.m. local time, a movement that would be consistent with someone trading on advance knowledge.
Bailey, however, downplayed suggestions of a leak, saying that “There's a lot going on in the world at the moment,” with a nod to Wednesday's events in the U.S. Federal Reserve Chair Jerome Powell had signaled at his press conference that the world’s most important central bank could start its own policy easing cycle as soon as its next meeting in September.
Article from Politico Online
August 1, 2024 1:04 pm CET
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