<\/p>\n
It\u2019s the central bank\u2019s first rate cut since the onset of the Covid-19 pandemic.<\/p>\n
The Bank of England has cut interest rates for the first time since the onset of the COVID-19 pandemic in early 2020 as inflationary pressures in the economy have eased.<\/p>\n
The bank said that by a 5-4 margin, its policymaking panel backed a quarter-point reduction in its main interest rate to 5%, from the 16-year high of 5.25%.<\/p>\n
It\u2019s the latest central bank to cut interest rates following a long stretch of increases. The U.S. Federal Reserve has yet to take the step but many think it will be ready to next month.<\/p>\n
Many economists thought that the Bank of England, which is independent of government, would join the Fed in keeping rates on hold once again given persistent price pressures in the services sector, which accounts for around 80% of the British economy.<\/p>\n
Though those concerns remain, certainly among the four opting to keep borrowing rates on hold, the majority on the panel think the hard medicine of higher borrowing costs has worked, with inflation in the U.K overall down at the bank\u2019s target of 2%.<\/p>\n
\u201cInflationary pressures have eased enough that we\u2019ve been able to cut interest rates today,\u201d said Bank Gov. Andrew Bailey, who voted for a cut. \u201cBut 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.\u201d<\/p>\n
Bailey\u2019s comment suggests that interest rates will not be falling dramatically over coming months, certainly nowhere near the pace that the bank had hiked them in recent years.<\/p>\n
Central banks around the world dramatically increased borrowing costs from near zero during the coronavirus pandemic when prices started to shoot up, first as a result of supply chain issues built up during the pandemic and then because of Russia\u2019s full-scale invasion of Ukraine which pushed up energy costs.<\/p>\n
Though no one is anticipating rates to fall to those previous lows, there are widespread expectations that the bank will cut again in coming months, especially as its forecasts suggest inflation will be below target in the next couple of years, despite a modest increase in the second half of the year.<\/p>\n
\u201cBut ultimately it is the data that will determine how interest rates evolve from here, with the bank hoping its conviction that underlying inflation pressures are fading will be vindicated,\u201d said Luke Bartholomew, deputy chief economist at abrdn, formerly known as Aberdeen Asset Management.<\/p>\n
The cut \u2014 and the potential of future cuts \u2014 are welcome news to millions of mortgage holders, certainly those whose borrowing costs track the bank\u2019s headline rate, though it will likely mean that the savings rates offered by banks will be reduced.<\/p>\n
David Hollingworth, associate director at L&C Mortgages, said the prospect of further rate cuts will help boost consumer confidence and that could help the housing market.<\/p>\n
\u201cThat will be important reassurance to many that have been scarred by the turbulent and volatile periods in the mortgage market over the last couple of years,\u201d he said.<\/p>\n
Higher interest rates \u2014 which cool the economy by making it more expensive to borrow \u2014 have helped ease inflation, but they\u2019ve weighed on the British economy, which has barely grown since the pandemic rebound.<\/p>\n
Critics of the Bank of England say it has being overly cautious about inflation in recent months and that it had maintained high interest rates for too long, unnecessarily harming the economy. Borrowing costs had been held at 5.25% since August last year, even though inflation was clearly on a downtrend while the economy stagnated.<\/p>\n
Other central banks, including the European Central Bank, have opted to cut rates but are doing so cautiously.<\/p>\n
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