The Bank of England has slashed interest rates by 5%—the lowest percentage since March 2020—to relieve the financial pressures on households. This was a close vote by the members of the Monetary Policy Committee, in consideration of eased inflation. Although this cut does give some relief, do not expect big further cuts for some months at least.

The Bank of England lowered interest rates to 5% today; it attempted its first move in this direction since the times of COVID. This has been done to relieve households after months of high borrowing costs, brought in to try to tame the worst inflation in forty years.

Decision Details

The vote to cut rates was not unanimous, though, with the Bank’s Monetary Policy Committee (MPC) voting five to four in favor. This required the deciding vote of Governor Andrew Bailey, which demonstrated the divide within the committee over whether this was the right time for the rate cut.

Why Now?

In June, inflation was maintained at Bank’s 2% target for a second month running. For its first cut, the cut was already priced in by financial markets, while economists were less convinced due to high inflation concerns that had been sustained. After the rate was cut again, British pound lost some of its value compared to the US dollar and the euro.

The Impact on Borrowers and Savers

Mr Bailey said that inflation pressures had come off enough to merit the cut, though he also warned that there would not be a “series of sharp cuts anytime soon” on account of risks to the economy. “We need to make sure inflation does stay low and stable,” he said, underscoring cautious future cuts.

Political Reactions

This interest rate cut is positive news for the new Labour government under Keir Starmer, who is working hard to deliver better living standards and growth. Even the Conservatives, including Rishi Sunak and Jeremy Hunt, posted about their consensus over past achievements regarding the reduction in inflation, for which they did not get any political mileage during their time in office.

Economic Context:

Inflation rose to 11.1% in October 2022, following the recent Russian invasion of Ukraine that sent energy prices through the roof. While inflation has retreated to the 2% target in recent readings, it has left prices above where they stood three years ago. The Bank is also concerned that prices continue to move up, particularly in the services sector and wages.

It was tough on households and businesses up and down the country, facing a steep increase in mortgage repayments after 14 successive rate rises from a record low of 0.1% in December 2021, as the central bank reacted to the highest rates of inflation since the early 1980s. Inflation peaked at 11.1% in October after Russia’s invasion of Ukraine sent energy prices surging.

How Will This Affect You?

For borrowers, the rate cut will spell some relief as mortgage payments, which increased every other month due to the rate hikes, may now stabilize or fall at least a little. The additional burden that was added to the monthly budget of homeowners will now lessen, but since it is a moderate cut, the relief may not be very substantial immediately.

The news is not quite so good for savers. Interest rates on savings accounts, which had been offering a little bit more because of the previous rate rises, may now offer less. That means money saved in those accounts will grow more slowly.

Future Outlook

It cautioned that inflation could spike over 2.75% in the very near term before falling towards 1.7% in two years and 1.5% by 2027. Growth in the economy has also been ahead of expectations; though the economy avoided recession with an expansion of 0.7% in the first quarter, it is facing a slowdown to 0.25% over the next months. Unemployment is forecast to increase next year, meaning the case for cutting the rate is all too justified.

The Bank remains cautious, pointing out that its monetary policy will now remain restrictive until such time that inflation risks are fully subdued. “Monetary policy will need to continue to remain restrictive for sufficiently long until the risks to inflation returning sustainably to the 2% target in the medium term have dissipated further,” the MPC said.

What Are the Experts Saying?

Economists have mixed feelings towards the rate cut. While some view it as a necessary step needed for support of the economy and mitigation of pressures emanating from high borrowing costs on households, others feel it may be untimely as the inflation rate, though lowered, is still high.

Political Responses

Rachel Reeves, the chancellor, greeted the rate cut but said that many families are still facing high mortgage rates, pointing out that though this cut is a step in the right direction, much more work remains to be done for the stabilization of the economy and the strengthening of households.

From the Conservative Party, Rishi Sunak and Jeremy Hunt also spoke about how they worked to reduce inflation while in government. They took to arguing that their policies helped set such a cut in the rate, despite not being in government to cheer on the impacts being taken.

The reduction in the base rates by Bank of England to 5% interest on rates will prove to be a giant step in alleviating the financial stress that household budgets are undergoing. While this gives some relief to borrowers, the short-term effect may be rather limited. The Bank remains focused on delivering long-term economic stability and low inflation. As the economic situation evolves further in the near future, it will undoubtedly attract the attention of policymakers and the general public as to how these changes are working out and what further steps may prove necessary.