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The Bank of England has cut interest rates for the first time in more than four years in a knife-edge vote, in a boost to the Labour government’s promise to kick-start economic growth.
The Monetary Policy Committee voted five to four to reduce the bank’s key rate by a quarter of a percentage point to 5 per cent, the BoE said on Thursday.
It also published inflation forecasts suggesting that further cuts lie ahead.
“Inflationary pressures have eased enough that we’ve been able to cut interest rates today,” said BoE governor Andrew Bailey, who was among the policymakers to vote for a cut.
“But we need to make sure inflation stays low, and be careful not to cut interest rates too quickly or by too much,” he added. “Ensuring low and stable inflation is the best thing we can do to support economic growth and the prosperity of the country.”
Sterling dropped to a four-week low against the dollar immediately following the announcement.
The pound extended earlier losses to 0.8 per cent to $1.276, while interest rate-sensitive two-year gilt yields dropped 0.06 percentage points to 3.76 per cent.
The decision comes after headline inflation fell to 2 per cent in May and stayed there in June, although services inflation has remained stubbornly high.
Officials had held borrowing costs at 5.25 per cent for a year in an effort to bring down inflation.
The BoE’s interest rate cut was greeted with relief in the Treasury, where chancellor Rachel Reeves is trying to revive economic growth and tackle what Labour has said is a £22bn hole in the public finances.
The BoE said that it expected headline inflation to climb from 2 per cent to 2.7 per cent later this year, before slowing. It added that consumer price inflation will drop to 1.7 per cent by 2026, and then to 1.5 per cent in 2027.
The bank also upgraded its GDP growth forecast for this year to 1.25 per cent from just half a per cent, and predicted expansion of 1 per cent in 2025.
The BoE’s decision is the latest sign of growing confidence among central banks that the post-Covid-19 price spike has been vanquished.
Earlier this summer, the European Central Bank was the first major central bank to lower rates. On Wednesday, the Federal Reserve voted to hold rates at a 23-year high but signalled it could cut borrowing costs as soon as September.
However, minutes to Thursday’s decision suggest the MPC was deeply divided over the move. Some of those who opted for a cut acknowledged the decision was “finely balanced”.
The BoE’s cut was opposed by rate-setters including the bank’s chief economist Huw Pill, who warned that domestic price pressures remain “more entrenched”.
Pill was joined by external members Megan Greene, Jonathan Haskel and Catherine Mann in opposing the rate move.
Bailey, Clare Lombardelli, the BoE’s new deputy governor, Sarah Breeden, Dave Ramsden and external member Swati Dhingra all voted for a cut.
The MPC last cut rates in March 2020 in the early months of the Covid-19 pandemic.
This is a developing story
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