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October 13, 2024
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Bank of England Announces 1st Interest Rate Cut Since March 2020

The Epoch Times

Governor Andrew Bailey welcomed the decision but added that risks of inflation persistence will be closely monitored.

The Bank of England (BoE) has announced the first interest rate cut in more than four years, a decision that was prompted by easing inflationary pressures.

The outcome of the Monetary Policy Committee (MPC) meeting on Thursday saw interest rates slashed from 5.25 to 5 percent.

Five MPC members felt that a reduction 0.25 percentage points was appropriate, while four members preferred the rate to remain unchanged.

This is the first drop since March 2020 and the first change from the 5.25 percent rate, held since August last year.

BoE Governor Andrew Bailey said that the decision to cut rates was “finely balanced” and comes amid inflation staying on the bank’s 2 percent target for two consecutive months.

The stability of price growth follows a period of elevated inflation rates, which peaked at 11.1 percent in October 2022. In the past year inflation has fallen from 8 percent in June 2023 to 2 percent in the latest data for May and June 2024.

“The UK economy has been stronger in recent months and this is very welcome too. But it does add to the risk that inflation could be higher than we expected, if we cut interest rates too much or too quickly,” Bailey said at the BoE’s press conference on Thursday.

Inflation

The bank will keep its monetary policy restrictive for as long as it takes for inflation to “sustainably” remain at the 2 percent target.

Bailey noted that despite the easing in the headline inflation rate, services price inflation and domestic inflation pressures remain elevated. June saw the services inflation rate hold at 5.7 percent, driven by strong growth in wages.

Inflation is expected to increase to around 2.75 percent over the second half of the year, owing to a smaller expected drag from domestic energy bills. Further down the line, inflation is expected fall back to 1.7 percent in two years’ time, and to 1.5 percent in three years.

Four MPC members, who preferred to hold interest rates at 5.25 percent, thought that there was a greater risk of more enduring structural shifts that will contribute to inflationary pressures.

These include a rise in the rate of unemployment, a fall in potential growth and a rise in the long-run neutral interest rate.

They felt it was more appropriate to maintain the interest rate until there was stronger evidence that these risks would not materialise.

Mortgages

Responding to the MPC decision, Chancellor Rachel Reeves welcomed the cut in interest rates. However, she warned that “millions are still facing higher mortgage rates” that followed the “disastrous” mini-budget by former Prime Minister Liz Truss.

“We will take the difficult decisions to fix the foundations, so we can rebuild Britain and make every part of our country better off,” Reeves said on social media platform X.

A drop in interest rates will be welcomed by many homeowners and aspiring first-time buyers, according to the Building Societies Association (BSA).

Commenting on the MPC’s decision, the head of mortgage and housing policy at the BSA, Paul Broadhead, said in a statement: “Whilst a 0.25 percent cut in the rate, to 5 percent, will not have a significant impact on the overall cost of mortgage payments, it is likely to boost to consumer confidence and lead to an increase in housing market activity.”

Broadhead added that savers may be a “little disappointed” at the rate cut.

“However, with inflation at 2 percent, most best buy savings rates, even with a cut, are likely to remain higher than inflation, meaning most savers will continue to enjoy real returns on their savings,” he said.

Interest rates still remain much higher than homeowners have been used to for the past decade, currently ranging from to 5.38 for an average five-year fixed rate mortgage, to 5.77 percent for a two-year rate.

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