London (AFP) – The Bank of England on Thursday cut its main interest rate for the first time since the Covid pandemic broke out in 2020, as British inflation has retreated in recent months. In a tight 5-4 vote, BoE policymakers agreed to reduce borrowing costs by a quarter-point to 5.0 percent, the central bank announced following a regular meeting. Governor Andrew Bailey joined four other policymakers in bringing the rate down from a 16-year high, which will ease pressure on borrowers while denting interest earned by savers. Retail banks tend to mirror the direction of BoE policy when setting their own interest rates.
“Inflationary pressures have eased enough that we’ve been able to cut interest rates,” Bailey said in a short statement. “But we need to make sure inflation stays low, and be careful not to cut interest rates too quickly or by too much.” Britain’s annual inflation rate has returned to the BoE target of two percent, after soaring to a four-decade high above 11 percent in late 2022.
– More cuts loom –
The US Federal Reserve on Wednesday left its key lending rate unchanged, but noted “some further progress” had been made in bringing inflation down. It is expected to cut in September. Following the BoE’s action Thursday, analysts said they expected the British central bank to cut again this year, but maybe not as early as next month. That helped the pound claw back earlier losses. Elsewhere, the European Central Bank has started to trim rates as gains to prices of global goods and services have largely slowed in recent months. By contrast, the Bank of Japan on Wednesday hiked borrowing costs for only the second time in 17 years amid a pickup in the country’s inflation.
– ‘Ensuring low inflation’ –
Britain’s rate cut comes less than one month after the country elected a new government. The centre-left Labour administration has vowed to grow the UK economy but has already warned that state spending will be hampered by tight finances. New finance minister Rachel Reeves on Monday said Britain’s state coffers faced an extra £22-billion ($28-billion) hole inherited from the previous Conservative government. Reeves said the scale of the overspend was “not sustainable,” and that not acting was “simply not an option” for her newly-elected government headed by Prime Minister Keir Starmer. The Conservatives said this indicated tax rises were on the way.
Bailey on Thursday added that “ensuring low and stable inflation is the best thing we can do to support economic growth and the prosperity of the country.” Later addressing a press conference, he urged caution following a “finely-balanced” rate decision. “The UK economy has been stronger in recent months and this is very welcome…but it does add to the risk that inflation could be higher” ahead. “Despite easing, services price inflation and domestic inflationary pressures do remain elevated,” he added.
The BoE hiked borrowing costs 14 times between late 2021 — when they stood at a record-low 0.1 percent — and the second half of last year. Its last cut was in March 2020. Supply-chain disruptions following Covid lockdowns, together with soaring food and energy prices caused by Russia’s invasion of Ukraine, sent global inflation surging.
© 2024 AFP
