Bank of England Rate Cut Takes Bank Rate to 5% After a Narrow Vote

Governor Andrew Bailey, Sarah Breeden, Swati Dhingra, Clare Lombardelli and Dave Ramsden voted for the reduction. Megan Greene, Jonathan Haskel, Catherine L Mann and Huw Pill preferred to keep Bank Rate unchanged.

Why the MPC moved

Twelve-month CPI inflation had been at the 2% target in May and June. The MPC said the impact from past external shocks had abated and that it was now appropriate to reduce the degree of policy restrictiveness slightly. The Governor described the decision as finely balanced and said the Bank must avoid cutting rates too much or too quickly. The accompanying Monetary Policy Report sets out the Bank's latest projections.

The inflation outlook

The Bank expects CPI inflation to rise to around 2¾% in the second half of 2024, as earlier falls in energy prices drop out of the annual comparison, before falling back. In the modal projection, inflation falls to 1.7% in two years and 1.5% in three years, conditioned on market-implied interest rates. The Committee said monetary policy will need to continue to remain restrictive for sufficiently long until the risks to inflation returning sustainably to target have dissipated further, and that it will decide the appropriate degree of restrictiveness at each meeting.

What it means for borrowers and lenders

A lower Bank Rate feeds through to tracker mortgages and other variable rate lending, and to the pricing of new fixed rate products over time. For banks and building societies, the cut may narrow margins on rate sensitive deposits and loans. Corporate treasurers and private equity sponsors refinancing floating rate debt will look for signals on the pace of any further moves. After the Bank of England rate cut, the Committee said it will decide the appropriate degree of monetary policy restrictiveness at each meeting.

Sources

• Bank of England: Monetary Policy Summary, August 2024
• Bank of England: Monetary Policy Report, August 2024