In its first cut for four years, the Bank of England (BoE) has reduced interest rates by 0.25%. The vote to lower the interest rate to 5.0% was close, with five members voting in favour and four against. The BoE was under pressure to make this reduction as inflation had hit its 2% target for the past two months.
Economists had predicted no cut until the next meeting in September. The Bank explained that cutting rates from 5.25%, which had been in place for over a year, was “appropriate to slightly reduce the degree of policy restrictiveness”. It added that “the impact of past external shocks has diminished and there has been some progress in moderating inflation persistence risks”.
Despite stronger-than-expected GDP, the restrictive monetary policy continues to weigh on real economic activity, leading to a looser labour market and reducing inflationary pressures, the Bank warned. While it did not indicate whether further cuts are forthcoming, the cooler inflation figures suggest it is likely.
The Bank expects the fall in headline inflation and normalisation in many inflation expectation indicators to continue to weaken pay and price-setting factors for businesses.
A 0.25% cut will not significantly impact mortgage holders or businesses with large loans but signals the Bank is moving in the right direction.
The Bank said: “A margin of slack should emerge in the economy as GDP falls below potential and the labour market eases further.
“Domestic inflationary persistence is expected to fade away over the next few years, owing to the restrictive stance of monetary policy.”
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