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The Bank of England has indicated that it may cut interest rates in August, which would mark the first reduction in borrowing costs in more than four years.
This announcement follows a decision on Thursday to maintain interest rates at 5.25%, a choice made in a closely contested vote.
Recent figures revealed that inflation slowed to 2% in May, aligning with the Bank’s target. Despite this positive development, concerns persist over high inflation in certain sectors. The minutes from the Bank’s rate-setting committee meeting revealed a significant shift in tone, suggesting that a majority might support a rate cut in their next meeting on 1 August. The committee stated they would assess whether the areas of concern are “receding.”
The committee’s minutes noted: “On that basis, the committee will keep under review for how long [the] bank rate should be maintained at its current level.”
While not a certainty, this language signals to markets and the public that a rate cut is likely after the Bank completes its new economic forecasts. Wednesday’s inflation data showed that price rises for services, including cinema tickets, restaurant meals, and holidays, remained higher than expected. However, the minutes explained that this slow fall in services inflation was due to one-off factors, such as the rise in the national living wage and inflation-linked bills like broadband and mobile services.
The members leaning towards a rate cut, seemingly including key Bank of England leaders, are downplaying the strength of underlying inflationary pressures. If enacted, an August rate cut would be the first since March 2020, just before the UK entered its first Covid lockdown.
Details from this month’s meeting revealed that the Bank’s committee voted 7-2 to hold rates, but the decision was more finely balanced than in previous meetings. For three members, holding rates this month was a “finely balanced” choice.
Bank of England Governor Andrew Bailey remarked, “It’s good news that inflation has returned to our 2% target. We need to be sure that inflation will stay low and that’s why we’ve decided to hold rates at 5.25% for now.”
The Bank of England, independent from the government, primarily aims to maintain stable inflation at 2%. In response to high inflation, the Bank has raised interest rates in recent years to curb inflation and ease the cost of living. Higher interest rates have increased borrowing costs for mortgages, credit cards, and loans, but have also boosted returns on savings.
While higher rates aim to slow inflation, they can also hinder economic growth by discouraging business investment and hiring, potentially reducing job creation.
