Bank of England Cuts Interest Rates Amid High Inflation: What's Driving the Decision?
The Bank of England has cut rates to their lowest since March 2023, despite inflation well above target. We examine the factors behind the decision and its economic implications.
Rate Cut Despite Elevated Inflation
The Bank of England has reduced its base rate to its lowest level since March 2023, even as inflation remains far above its 2% target. The move, decided by a narrow MPC majority and marked by a rare second vote, reflects the central bank’s view that weakening labour market pressures will ease inflationary forces over the medium term.
Labour Market Cooling
Recent data show a decline in job vacancies and a slight rise in unemployment, prompting the Bank to conclude that wage-driven inflation risks have diminished. However, Governor Andrew Bailey and his team face scrutiny, given persistent food price inflation and the likelihood of another rate cut in November.
Economic Growth and Consumer Confidence
Although five rate cuts this past year aim to stimulate the economy, GDP growth is forecast at a mere 0.1% for Q2 by the Office for National Statistics. The Bank anticipates a rebound to 0.3% in Q3, aided by improved exports following the Prime Minister’s US trade deal.
High household savings—still at pandemic-era levels—have held back consumer spending, despite real wage growth outpacing inflation. The central bank expects that normalising savings rates will eventually support stronger growth.
Looking Ahead
The Bank acknowledges greater uncertainty over the pace of future cuts, especially amid risks of sustained inflation from food prices and the impact of recent government policy changes, including higher National Insurance and the Living Wage.
Despite sustained inflationary pressures, the Bank of England cut interest rates, betting that a cooling labour market and strong household savings will eventually support economic growth.
This topic was reported by BBC News.
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