Monetary Policy Committee lowers bank rate to amid mixed inflation signals

The Bank of England’s Monetary Policy Committee (MPC) decided on to reduce the Bank Rate by 0.25 percentage points, bringing it to 5 per cent.

Millions of homeowners and first time buyers were handed a major boost today when the Bank of England slashed another quarter point off interest rates.

The decision, which was widely expected in the City, brings the Bank’s benchmark rate down from 5% to 4.75%, its lowest level since June last year.

It follows a similar move by the Bank in August which was the first cut for four years.

The Bank’s rate setting Monetary Policy Committee (MPC) voted by eight to one to lower the cost of borrowing again after seeing inflation ease more quickly than forecast to just 1.7 per cent and wage growth slow.

It will mean an immediate reduction in bills for borrowers on variable or tracker rate deals linked to Bank of England rates, although they only make up about 15 per cent of the total.

The monthly repayment on a typical London £300,000 mortgage will fall by about £42 from £1,667 to £1,625. However, the vast majority who are on fixed rates will see no immediate change in their bills until they come to remortgage.

However it is more good news for first time buyers looking to raise funding for a purchase to get them on the property ladder and can be expected to feed through to more activity in the market. Lender Halifax this morning revealed that the average UK house price reached a new all-time high last month.

The decision to lower the Bank Rate comes amid evidence that inflation is stabilizing. Consumer Price Index (CPI) inflation met the MPC’s 2% target in both May and June, but is expected to rise to approximately 2.75% later in the year. This anticipated increase reflects the fading impact of last year’s energy price declines, which had previously moderated headline inflation. Despite this predicted uptick, the MPC expressed confidence that ongoing measures would help steer inflation toward the 2% target sustainably.

In its report, the MPC detailed the mixed signals regarding inflation and economic activity that influenced its latest policy adjustment. The economy showed signs of growth, with GDP expanding by 0.7% in the first quarter and continuing to grow into the second. However, private sector wage growth, although slowing to 5.6%, remains elevated. Services inflation was similarly robust, standing at 5.7% in June, though it has shown signs of moderation. The MPC noted that underlying momentum in the economy appears weaker, despite the headline growth figures.

One of the key factors the MPC considered in its decision was the potential for “second-round” effects on inflation. These effects, which include wage-price spirals and sustained price pressures, could keep inflation elevated. Although the MPC has observed a normalization in inflation expectations, it remains cautious of these lingering second-round effects, which it describes as having a potentially enduring impact on inflation. This risk, paired with the slower-than-expected cooling of the labor market, contributed to the close nature of the MPC’s vote.

In terms of the international backdrop, the MPC highlighted stable global economic activity, noting that both U.S. and eurozone GDP saw steady growth in recent quarters. The committee observed slight easing in inflation across major economies, indicating some progress toward normalizing consumer prices. However, risks to inflation remain, particularly in internationally traded goods. Chinese export prices have been unexpectedly high, raising concerns that a reversal in global trade conditions could impact UK inflation. Additionally, geopolitical developments in the Middle East continue to pose potential risks to commodity prices, while supply chain disruptions could further affect the prices of traded goods.

The MPC’s reduction of the Bank Rate comes amid financial conditions in the UK that have remained relatively restrictive. The value of sterling has appreciated by 3% since the start of the year, helping to temper inflationary pressures by reducing import costs. However, the Bank noted that how much this impacts overall inflation depends on factors driving the appreciation and the extent of pass-through to consumers.

In making its decision, the MPC expressed concerns that underlying domestic demand could prove stronger than anticipated, potentially sustaining inflationary pressures. Despite a recovery in household incomes, retail spending remains restrained, suggesting that recent income gains have largely been saved rather than spent. However, indicators such as consumer confidence and major purchase intentions suggest a possible strengthening of demand that could exceed current projections.

Looking ahead, the MPC anticipates that inflation will decline further in the coming years, though this projection hinges on the persistence of inflationary dynamics. If demand remains stronger than expected or structural shifts in the economy lead to higher equilibrium unemployment, inflation could remain elevated. The MPC’s August Monetary Policy Report projects that CPI inflation will fall to 1.7% within two years and to 1.5% within three years, assuming continued tight monetary conditions.

Despite its decision to lower the Bank Rate, the MPC maintains that monetary policy will remain restrictive to address inflationary risks effectively. The committee underscored that it would continue assessing a broad range of economic indicators to determine the appropriate policy stance in future meetings. Bank of England Governor Andrew Bailey, who voted in favor of the rate reduction, emphasized the importance of maintaining flexibility in response to new economic data.

Of the four committee members who opposed the rate cut, several pointed to elevated services inflation, strong wage growth, and robust GDP as signs that inflationary pressures could be more persistent. These members argued that the restrictive policy should be maintained at 5.25% until more substantial evidence emerges to suggest inflation will continue to ease sustainably. They noted that despite the fall in headline inflation, core inflationary pressures remain entrenched.

Looking forward, the MPC will vote in September on the targeted reduction of UK government bonds for the following year, with current holdings standing at £690 billion. The committee continues to weigh its options carefully, mindful of the broader impact of its policies on households, businesses, and financial markets.

In concluding its August summary, the MPC reaffirmed its commitment to steering inflation back to the 2% target while monitoring risks closely. This decision marks a cautious shift in policy as the Bank navigates a complex economic landscape with a mix of positive growth signals and lingering inflationary pressures.