The Bank of England has made a significant move today by cutting interest rates in an effort to revive the flagging UK economy. In a decision by the Monetary Policy Committee, the Bank voted 7-2 in favour of reducing interest rates from 4.75 per cent to 4.5 per cent. This is the lowest interest rate the country has seen in over 18 months and is expected to provide much-needed relief to mortgage holders, offering some breathing room in the face of rising living costs.
The decision to cut rates, however, was not unanimous. Two members of the committee voted for a more substantial 0.5 percentage point reduction, indicating the depth of concern regarding the economic slowdown in the UK. This slowdown is partly attributed to the aftermath of the Budget, particularly the tax increases imposed by Rachel Reeves, which are having a significant impact on the wider economy.
The Bank of England’s decision comes amid slow progress in easing inflation. Although inflation had been expected to fall more quickly, it has instead remained more persistent. The Bank has warned that inflation is likely to increase “materially” in the first half of this year, with key factors contributing to this rise including the surge in energy prices, an increase in water bills, and the rise in national insurance contributions. These pressures are contributing to the cost of living crisis, and the Bank has acknowledged that managing inflation remains a key challenge.
In a dramatic shift, the Bank has halved its growth forecast for the UK this year. Initially, the Treasury’s Office for Budget Responsibility (OBR) had predicted growth of 1.5 per cent, but this figure has now been revised down to just 0.75 per cent. Despite this, there are expectations that growth will pick up later in the year. This downgrading of growth forecasts reflects the ongoing challenges facing the economy, and the Bank has warned that the impact of the national insurance rise, combined with global economic factors, will continue to weigh heavily on the UK economy.
The Bank of England’s primary aim with the rate cut is to stimulate economic activity and kickstart growth. The Bank has chosen to prioritise this over fears that trade tariffs, particularly those imposed by the US under Donald Trump’s administration, could lead to higher inflation. The Bank’s tools, including interest rate changes, are designed to counter inflationary pressures, but the current economic environment has led to difficult decisions about balancing inflation control with the need to support growth.
Meanwhile, Chancellor Rachel Reeves faces mounting pressure as businesses continue to warn that they will be forced to make tough decisions, including job cuts and price hikes, due to the national insurance increase. The Chancellor has been scrambling to find policies that will support businesses and stimulate economic growth, but the concerns around job losses and rising prices are becoming harder to ignore. The stalling economic growth has led to further concerns that Reeves may need to take additional action, either by raising taxes again or cutting public spending in order to balance the books in the coming months.
Despite these challenges, the news of the Bank of England’s interest rate cut provided some positive momentum in the stock market. The FTSE 100 hit a new record high, signalling investor optimism, even as the pound fell sharply against the dollar in response to the broader economic challenges. As the Bank of England continues to monitor the economy and adjust its policies, the impact of today’s rate cut will play a key role in shaping the UK’s economic outlook in the months ahead.
Bank of England Governor Andrew Bailey stated that the recent interest rate cut will be “welcome news to many” but stressed that the Monetary Policy Committee (MPC) is closely monitoring both the UK economy and global developments. Bailey emphasised the importance of taking a gradual and cautious approach to further rate reductions.
He commented: “It will be welcome news to many that we have been able to cut interest rates again today. We’ll be monitoring the UK economy and global developments very closely, and taking a gradual and careful approach to reducing rates further.” Bailey also reiterated the Bank’s commitment to maintaining low and stable inflation, describing it as “the foundation of a healthy economy,” and assured that it is the Bank’s responsibility to ensure this stability.
In response to the interest rate cut, Shadow Chancellor Rachel Reeves welcomed the decision, acknowledging its positive impact on easing cost-of-living pressures for families and making it easier for businesses to access financing. However, she expressed dissatisfaction with the current growth rate, stating: “This interest rate cut is welcome news, helping ease the cost of living pressures felt by families across the country and making it easier for businesses to borrow to grow. However, I am still not satisfied with the growth rate.”
Reeves highlighted the Labour Party’s “Plan for Change,” which aims to accelerate economic growth and put more money in the pockets of working people. She committed to tackling the barriers hindering growth, including scrapping unnecessary regulatory obstacles and investing in key infrastructure such as roads and rail.
In contrast, Conservative Shadow Chancellor Mel Stride criticised the government’s handling of the Budget, suggesting that it is likely to result in fewer rate cuts this year than initially anticipated. Stride described the Budget as “disastrous” and implied that its effects could hamper further economic recovery.
Under new leadership, the Conservative Party has pledged to support businesses and entrepreneurs in the UK, with a focus on creating jobs and fostering wealth. The party argues that this approach is the only way to drive economic growth, ensuring a more secure future for everyone.
Efforts to combat soaring inflation in recent years have led to interest rates being significantly higher than usual following the aftermath of the credit crunch. In late 2023, the base rate peaked at 5.25 per cent. However, over the course of several months last year, the Bank of England’s policymakers reduced it to 4.75 per cent. The last time the base rate was set at 4.5 per cent was in May 2023.
The Bank typically raises interest rates when inflation is high in an effort to curb consumer spending and slow the rate of price increases. At present, inflation stands significantly lower than its peak in recent years, currently at 2.5 per cent annually. However, concerns about rising global trade tensions, particularly with threats from former US President Donald Trump to impose tariffs on major trading partners like China, have raised fears of a trade war that could drive up prices sharply.
ICAEW Economics Director Suren Thiru commented on the recent rate cut, stating: “This decision confirms that UK interest rates are firmly locked onto a downward trajectory, providing a much-needed fillip to consumers battling with high mortgage costs and businesses still reeling from a painful budget.”
He further acknowledged that while the rate cut may boost morale, it is unlikely to provide enough relief for many individuals and businesses facing financial strain, given the limited progress in reversing the significant rate hikes of previous years. Thiru noted that the unanimous decision to loosen monetary policy suggests that concerns over the UK’s struggling economy currently outweigh worries about rising inflation, potentially paving the way for another rate cut in the near future.
Meanwhile, a survey conducted yesterday of companies in the service sector, which includes everything from retail and hospitality to finance and legal firms, revealed that cost inflation in the industry had slightly increased in January. Although most economists believe that these signs of rising inflation are unlikely to prevent policymakers from cutting rates today, they may prompt caution at future meetings, particularly in March and May.
The increase in cost inflation can be partially attributed to the policies introduced during the October Budget. One of the key measures announced by Chancellor Ms Reeves was the rise in national insurance contributions for companies.
The intention behind this move was to generate more revenue for the Government, which would be directed towards public services such as the NHS. However, some businesses have raised concerns that this increase in national insurance is driving up their operational costs, which in turn is contributing to the ongoing rise in inflation.
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