(qlmbusinessnews.com Fri. 2nd Aug, 2024) London, UK —
“Bank of England Cuts Interest Rates to 5% Amid Inflation Control Efforts”
The Governor of the Bank of England has described the recent decision to reduce interest rates as a “significant moment,” while cautioning the public against expecting further rapid reductions in the near future.
In a closely contested decision, the Bank lowered rates from 5.25% to 5%, marking the first reduction since the onset of the pandemic in March 2020. Interest rates influence the cost of borrowing from High Street banks and money lenders for mortgages and credit cards.
Andrew Bailey, the Bank's Governor, stated that decreased inflation had allowed for the rate cut but emphasised to the BBC that the mission was “not yet accomplished.” He added that policymakers must ensure inflation remains low and avoid reducing rates too quickly or excessively.
Interest rates have risen over recent years as the Bank has struggled to control soaring prices, impacting household finances despite improved returns for savers.
The reduction to 5% means homeowners with tracker mortgages will see immediate reductions in their monthly payments, while those on variable rate deals may also benefit. However, homeowners with fixed-rate mortgages still face the prospect of higher rates when their current deals expire.
Consumer Confidence Boost
There is hope that lower interest rates will boost consumer confidence, which has been subdued. Rupali Wagh, co-owner of Tukka Tuk street food in Cardiff Market, said a rate cut would be beneficial as customers would have more disposable income. Despite recent business growth due to warmer weather, some customers still spend cautiously and discuss mortgages and expenses.
Future Rate Cuts.
When questioned if this rate cut was a “one and done” scenario, Mr Bailey indicated that he had no fixed view on the future path of rates and that the Bank would decide on a meeting-to-meeting basis. Financial markets predicted a 75% chance of another rate cut in November, following the Labour government's first Budget at the end of October.
The decision by the Bank’s nine-member committee was finely balanced, with five members, including Mr Bailey, voting for the cut. The Bank’s Chief Economist, Huw Pill, who was among the four who voted to maintain the rates, stressed the importance of monetary policy in controlling the cost of living and suggested other instruments could be more effectively targeted to help those in need.
Mortgage Challenges Ahead
While the rate cut provides relief for some homeowners, the Bank of England warned of future challenges for others. Approximately a third of people with fixed-rate mortgages are still paying less than 3%, having secured deals when rates were much lower. These home loans are expected to expire before the end of 2026, meaning that effective interest rates will likely rise further over that period.
Inflation and Wage Growth
The inflation rate, which measures the pace of price increases for goods and services, hit the Bank’s 2% target in May and has remained there. However, core inflation, which excludes volatile elements like food and fuel prices, remains relatively high. The Bank anticipates inflation to rise in the second half of the year as energy bills increase during colder months. Although wage growth has slowed, it will continue to be monitored by the Bank.
Public Sector Pay Rise
The Bank does not expect the recent public sector pay rise promised by Chancellor Rachel Reeves to significantly impact inflation. Ms Reeves confirmed wage increases between 5% and 6% for public sector staff, including NHS workers and teachers. Mr Bailey suggested these increases would have a “very small” effect on inflation.
Ms Reeves welcomed the rate cut but noted that “millions of families” still face higher mortgage rates due to former Prime Minister Liz Truss's mini-budget. She stated that the government is “making difficult decisions” to fix the economy after “years of low growth.”
In contrast, former Conservative Prime Minister Rishi Sunak criticised Labour’s “inflation-busting public sector pay rises,” claiming they could jeopardise further rate cuts. On Monday, Ms Reeves claimed the previous Conservative government had left a £22bn “black hole” in public finances, which the Conservatives have denied, accusing Labour of setting the stage for tax increases.
The Bank confirmed it had been briefed by the Treasury about these figures before Ms Reeves made her statement in the House of Commons.
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