Bank of England cuts interest rates from 16-year high

The Bank of England (BoE) has cut interest rates to 5% in a knife-edge decision that will bring relief to millions of mortgage holders and businesses.

After a sharp fall in inflation this year, Threadneedle Street opted for its first reduction in borrowing costs since ratcheting up interest rates from a record low of 0.1% in December 2021 to level of 5.25%.

Bank of England governor Andrew Bailey said: “Inflationary pressures have eased enough that we’ve been able to cut interest rates today.”

However, Bailey warned that policymakers needed to be wary that they do not cut interest rates “too quickly or by too much”.

"But we need to make sure inflation stays low, and be careful not to cut interest rates too quickly or by too much. Ensuring low and stable inflation is the best thing we can do to support economic growth and the prosperity of the country."

The Bank’s monetary policy committee has voted by a majority of five to four to reduce the Bank rate by 0.25 percentage points, to 5%.

Read more: FTSE 100 LIVE: London and European stocks lower as interest rates cut

Five members — Andrew Bailey, Sarah Breeden, Swati Dhingra, Clare Lombardelli and Dave Ramsden — voted in favour of the proposition. Four members — Megan Greene, Jonathan Haskel, Catherine L Mann and Huw Pill — voted against the proposition, preferring to maintain the rate at 5.25%.

This is the first time that the Bank has lowered interest rates since its emergency rate cut in March 2020.

UK consumer price inflation returned to the BoE's 2% target in May and stayed there in June, down from a 41-year high of 11.1% struck in October 2022. However, stubborn price rises in the services sector raised doubts about whether the MPC would cut rates before September.

Laith Khalaf, head of investment analysis at AJ Bell, said today’s announcement was more “symbolic than substantial”.

“A rate cut marks an entry into a new phase of interest rate policy, but at street level the reality is financial conditions won’t change much,” he said.

“Especially for the horde of people who will be rolling off cheap fixed-rate mortgages this year and encountering a new and bracing financial reality.”

Money markets indicate there will be another interest rate cut by the Bank of England before the end of the year.

Traders have added to their bets on rate cuts, and are pricing in 35 further basis points of reductions in borrowing costs. This means they expect at least one more quarter of a percentage point reduction to 4.75% by the end of 2024.

Read more: Eurozone inflation unexpectedly edges up to 2.6% in July

Alice Haine, personal finance expert at Bestinvest, said the move will bring some relief to the property market.

“While a rate cut won’t be the answer to everyone’s prayers, it would mean those with heavy debts along with mortgage borrowers looking to refinance and first-time buyers looking to get on the property ladder can now look forward to brighter days ahead."

The BoE joins the European Central Bank in cutting interest rates. The US Federal Reserve, however, opted to hold interest rates steady on Wednesday.

The Federal Reserve chair Jerome Powell said that a rate cut could be on the table at September’s meeting in comments that helped US markets to finish higher.

The BoE expects the UK economy to grow 1.25% this year, higher than its last forecast. However, policymakers kept their outlook for 2025 the same at 1%.

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