LONDON (AP) – The Bank of England cut its main interest rate by a quarter of a percentage point to 4.75 per cent yesterday after inflation across the United Kingdom (UK) fell significantly, relieving some pressure on borrowers who have faced elevated mortgage and loan costs.
The bank said eight of the nine members of its rate-setting panel backed the reduction – the second in three months – while one opted to keep borrowing costs on hold. The latest cut comes after inflation in the UK fell to an annual rate of 1.7 per cent, its lowest level since April 2021.
Though inflation has fallen below the bank’s target of two per cent, Governor Andrew Bailey cautioned that interest rates would not be falling too fast over coming months. “We need to make sure inflation stays close to target, so we can’t cut interest rates too quickly or by too much,” he said.
“But if the economy evolves as we expect it’s likely that interest rates will continue to fall gradually from here.”
Central banks worldwide dramatically increased borrowing costs from near zero during the coronavirus pandemic when prices started to shoot up, first as a result of supply chain issues built up and then because of the war in Ukraine which pushed up energy costs.
As inflation rates have recently fallen from multi-decade highs, the central banks have started cutting interest rates.
Economists have warned that worries about the future path of prices following last week’s tax-raising budget from the new Labour government and the economic impact of US President-elect Donald Trump may limit the number of cuts next year.
The decision comes a week after Treasury chief Rachel Reeves announced around GBP70 billion (USD90 billion) of extra spending, funded through increased business taxes and borrowing. Economists think that the splurge, coupled with the prospect of businesses cushioning the tax hikes by raising prices, could lead to higher inflation next year.
Rate-setters said they considered the budget measures during their deliberations and concluded they would likely boost growth by 0.75 percentage point and inflation by 0.5 percentage point over the coming year.
The rate decision also comes a day after Trump was declared the winner of the US presidential election. He has indicated that he will cut taxes and introduce tariffs on certain imported goods when he returns to the White House in January. Both policies have the potential to be inflationary both in the US and globally, thereby prompting Bank of England policymakers to keep interest rates higher than initially planned.
