England cuts rates by 0.25%

The Bank of England (BOE) announced on Thursday a rate cut of 0.25 percentage points to 5 per cent following its meeting ending on July 31, 2024.

This decision, passed by a narrow majority of 5–4, marks a shift in monetary policy aimed at addressing ongoing inflationary pressures while supporting economic growth and employment.

The Monetary Policy Committee’s (MPC) reduction of the bank rate comes in the context of a complex economic landscape, aims to achieve a 2 per cent inflation target sustainably while fostering growth and job creation.

The August Monetary Policy Report released alongside the decision outlines updated projections for economic activity and inflation.

Inflation, measured by the Consumer Price Index (CPI), met the MPC’s 2 per cent target in both May and June; however, CPI inflation is expected to rise to approximately 2¾ per cent in the latter half of the year due to the fading impact of last year’s energy price declines.

Despite this, private sector regular average weekly earnings growth has decreased to 5.6 per cent for the three months ending in May, and service consumer price inflation has fallen to 5.7 per cent in June.

The MPC’s framework differentiates between first-round and second-round inflation effects, focusing now on the latter due to persistent inflationary pressures.

Despite strong GDP growth this year, economic momentum is weaker than expected.

The decision to lower the bank rate reflects a need for slightly less restrictive policy, given reduced impacts from past external shocks and progress in managing inflation risks.

However, the MPC warns that inflation from second-round effects might persist, influenced by unexpected demand and structural factors. The committee will keep a close watch on these risks and adjust policy to balance inflation control with economic stability.

Attribution: The Bank of England (BOE)