Bank of England lowers its main interest rate by upto 5% its first cut after a long time

LONDON — In a significant move, the Bank of England enacted its first interest rate reduction in over four years, lowering the key rate to 5%.

Despite speculation among analysts about a potential rate cut, the decision remained uncertain due to a lack of explicit guidance from the central bank. The vote concluded with a narrow margin of 5-4 in favour, as Governor Andrew Bailey emphasized a cautious approach from the committee.

Market expectations indicated a 61% chance of a 25-basis-point reduction in the key rate during the August meeting, even though U.K. inflation had met the BOE’s 2% target for two consecutive months. The Bank Rate had been held at a 16-year high of 5.25% since August 2023.

The Bank of England typically provides less forward guidance than other central banks, making Thursday’s decision particularly noteworthy given the recent six-week period of communication restrictions due to the U.K. general election.

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Previous voting patterns had shown two members advocating for a rate cut and seven favoring a hold, with some of the BOE’s more hawkish members expressing concerns about wage growth and persistent inflation in the services sector.

The announcement was made at midday U.K. time, followed by a press conference. The quarterly Monetary Policy Report was also released, offering economic growth and inflation forecasts.

British Gilt Yields Decline Following Rate Decision

The yield on British gilts fell after the Bank of England’s announcement of a 25-basis-point rate cut. The 10-year gilt yield dropped by 4 basis points to 3.932% at 12:36 p.m. London time, while the 2-year gilt yield decreased by 5 basis points to 3.762%.

A Necessary Move to Counter Inflation,’ Says Bank of England Governor

Governor Andrew Bailey described the rate cut as a “finely balanced” decision, welcoming the news. He highlighted the recent strength of the U.K. economy and stressed the importance of avoiding a rapid resurgence of inflation.

“We must leave the period of high inflation behind,” Bailey stated, noting Britain’s progress in achieving the BOE’s 2% inflation target.

Sterling Drops to a One-Month Low

The British pound fell 0.76%, reaching a one-month low against the U.S. dollar shortly after the interest rate cut announcement. Sterling was last seen trading at $1.2763 at 12:10 p.m. London time.

Strategist Predicts a Collective Relief Following Rate Reduction

Lindsay James, an investment strategist at Quilter Investors, noted that the BOE’s decision to lower interest rates would likely bring widespread relief to consumers and businesses. She emphasized the 5-4 split in the Monetary Policy Committee’s decision, cautioning that the central bank aims to avoid cutting rates too swiftly, which could lead to renewed inflationary pressures.

James also remarked on the Labour government’s awareness of the need for economic growth, noting that investors have generally responded positively to the stability provided by the new administration, especially in contrast to the political uncertainty in Europe and the U.S.

BOE Cautions Against Rapid Rate Cuts Despite Falling Inflation

The Bank of England noted in its Monetary Policy Report that falling inflation indicates the effectiveness of its restrictive policy. However, it warned that inflationary risks remain and that further rate cuts must be approached with caution.

“Today’s rate cut is a response to easing inflationary pressures, but the decision was carefully weighed,” the report stated. “We must ensure inflation remains low, so we must be prudent in further rate reductions.”

Chancellor Welcomes Interest Rate Cut

Rachel Reeves, the new Chancellor of the Exchequer, commented on the BOE’s decision, describing it as “welcome news” for millions of households facing high mortgage rates following the previous government’s mini-budget. She emphasized the Labour government’s commitment to addressing economic challenges and improving the nation’s financial health.

Bank of England Reduces Interest Rates by 25 Basis Points

In a closely watched decision, the Bank of England lowered its key interest rate by 25 basis points, bringing it down from a 16-year high of 5.25% to 5.0%. The decision, which was seen as a close call, was supported by a 5-4 vote among policymakers.

Pound Under Pressure Ahead of BOE Announcement

The British pound was 0.6% lower against the U.S. dollar less than an hour before the Bank of England’s announcement and 0.3% lower against the euro. Blue-chip stocks on the FTSE 100 index were down 0.13% at 11:15 a.m. in London.

Bank Rate at Its Highest in Over a Decade

The Bank of England raised its key rate, known as the Bank Rate, from 0.1% in November 2021 to 5.25% in August 2023 to combat rising inflation. This was the highest level since 2008 when central banks globally embarked on a period of monetary easing following the Great Financial Crisis.

Cautious Rate Cut Expected, Says Stan Chart Strategist

Steven Englander, head of Global G10 FX research and North America macro strategy at Standard Chartered Bank, commented on the upcoming decision, predicting a cautious approach from the BOE.