First interest rates cut in over four years

The Bank of England’s Monetary Policy Committee (MPC) met on 1 August and in a very close 5-4 vote decided to reduce interest rates by 25 basis points to 5%. The 4 remaining members voted to keep the rate at 5.25%.

This was the first interest rate cut announced by the Bank of England since March 2020 and sees the interest rate fall from a 16 year high. The rolling twelve-month CPI inflation was at the MPC’s 2% target in both May and June, and this helped prompt the decision to reduce rates.

Whilst the figures demonstrated that inflationary pressure has eased there remains fears of higher inflation returning. The Governor of the Bank of England, Andrew Bailey was also keen to dampen expectations and point out that there is unlikely to be a succession of interest rate cuts in the near-term.

Delivering opening remarks at a press conference following the announcement, Bailey commented:

‘We need to make sure that inflation stays low. We need to put the period of high inflation firmly behind us. And we need to be careful not to cut rates too much or too quickly – all the while monitoring the evidence on how inflationary pressures are evolving.

The best and most sustainable contribution monetary policy can make to growth and prosperity is to ensure low and stable inflation – and an economy where people can plan for the future with confidence and in which money holds its value.

We have truly come a long way in returning inflation to target.’