On Thursday, the Bank of England (BoE) lowered interest rates for the second time since 2020, reducing the main rate from 5% to 4.75%. The decision, supported by an 8 to 1 vote, surprised analysts. Governor Andrew Bailey emphasized the need for caution to maintain inflation targets. The new Labour government’s budget is expected to boost economic growth by 0.75% next year but may cause a temporary inflation rise. The pound increased slightly, while the FTSE index dipped.
Bank of England Makes Significant Move on Interest Rates
On Thursday, the Bank of England (BoE) made headlines by lowering its interest rates for only the second time since 2020, following the unveiling of the new Labour government’s budget. The decision comes amidst ongoing concerns about inflation and economic growth, with the BoE indicating that any future cuts would be implemented gradually.
The Monetary Policy Committee (MPC) voted 8 to 1 in favor of reducing the main interest rate from 5% to 4.75%. This decision surprised many analysts, as a Reuters poll had anticipated a narrower vote of 7 to 2. Catherine Mann, one of the MPC members, voiced her dissent, advocating for maintaining the current rates.
Outlook for Inflation and Economic Growth
BoE Governor Andrew Bailey emphasized the importance of keeping inflation near its target, stating, “We must ensure that inflation remains close to the target, so we cannot reduce interest rates too quickly or too significantly.” He added that if economic conditions unfold as expected, a gradual decline in interest rates could be on the horizon.
The recent budget presented by Finance Minister Rachel Reeves is projected to boost the UK economy by approximately 0.75% next year. However, it is not expected to significantly alter annual growth rates in the next few years. The BoE also noted that the budget might contribute to a temporary rise in inflation, indicating a potential delay in achieving the 2% inflation target.
Moreover, the BoE adjusted its growth forecasts for this year to 1% from an earlier prediction of 1.25%, while raising the outlook for 2025 to 1.25%. This change accounts for anticipated government investment and consumption patterns, which could offset some impacts of tax increases.
In the wake of the BoE’s announcements, the pound saw an uptick, climbing to $1.29405, while British government bonds experienced a slight adjustment. The FTSE index on the London Stock Exchange dipped by 0.07% to 8,161.37 points, reflecting market reactions to the BoE’s cautious approach to future rate cuts.