The Bank of England made a significant decision on Thursday by cutting interest rates for the first time since the start of the pandemic. This move aims to provide relief to households facing the highest borrowing costs in 16 years. The decision lowered the benchmark interest rate in the United Kingdom from 5.25% to 5%, ending a period where the rate had remained unchanged since September.
The decision was not unanimous, with five members of the Bank of England's monetary policy committee voting in favor of the rate cut, while four preferred to keep it on hold. Despite the reduction, the interest rate remains at its highest level since April 2008.
One of the key factors influencing this decision was the recent slowdown in UK inflation, which dropped to 2% in May and remained at that level in June, meeting the Bank of England's target for the first time in nearly three years. The Bank noted that the impact of past external shocks has lessened, and there has been progress in mitigating inflation risks.
While the UK's GDP has shown stronger performance than expected, the Bank of England highlighted that the tight monetary policy stance has been weighing on economic activity, leading to a softer labor market and reducing inflationary pressures.
The decision to cut interest rates comes shortly after the US Federal Reserve chose to maintain its rates. However, Fed chair Jerome Powell hinted that a rate cut could be considered in the upcoming September meeting.
This rate cut by the Bank of England is expected to have a positive impact on the housing market, as mortgage costs are likely to decrease. Major lenders, such as Nationwide, have already introduced sub 4% fixed-rate mortgages, with others expected to follow suit.
Despite the rate cut, some Bank of England policymakers remain cautious about inflation, particularly in the services sector where inflation stands at 5.7%. The Bank emphasized the need for continued restrictive monetary policy until inflation risks are sufficiently mitigated.
