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The Bank of England has cut interest rates for the first time in more than four years in a knife-edge vote, in a boost to the Labour government’s efforts to lift economic growth.
The Monetary Policy Committee voted five to four to reduce the bank’s key rate by a quarter of a percentage point to 5 per cent, the BoE said on Thursday.
It also published inflation forecasts suggesting that further interest rate cuts lie ahead.
“Inflationary pressures have eased enough that we’ve been able to cut interest rates today,” said BoE governor Andrew Bailey, who was among the policymakers to vote for a cut.
“But we need to make sure inflation stays low, and be careful not to cut interest rates too quickly or by too much,” he added. “Ensuring low and stable inflation is the best thing we can do to support economic growth and the prosperity of the country.”
Sterling dropped to a four-week low against the dollar immediately following the announcement.
The pound extended earlier losses to 0.8 per cent to $1.276, while interest rate-sensitive two-year gilt yields dropped 0.06 percentage points to 3.76 per cent.
The decision comes after headline inflation fell to 2 per cent in May and stayed there in June, although services inflation has remained stubbornly high.
Officials had previously held borrowing costs at 5.25 per cent for a year in an effort to bring down inflation.
The cut was opposed by rate-setters including the bank’s chief economist Huw Pill, who warned that domestic price pressures remain “more entrenched”.
Pill was joined by external members Megan Greene, Jonathan Haskel and Catherine Mann in opposing the rate move.
Bailey, Clare Lombardelli, the BoE’s new deputy governor, Sarah Breeden, Dave Ramsden and external member Swati Dhingra all voted for a cut.
The MPC last cut rates in March 2020 at the height of the Covid-19 pandemic.
The decision will come as a relief to UK households and businesses after the BoE lifted interest rates to a 16-year high in a bid tame a surge in inflation.
This is a developing story