The Bank of England has decided to hold its key interest rate at 4%. This decision is the third in a series of gradual cuts that began in August 2024. This was a surprising decision by the bank as they had been cutting the interest rate every quarter since early 2020. Their intention is to fight the effects of persistent inflation, which is now at 3.8%, far exceeding their goal of 2%. The members of the Monetary Policy Committee are the nine members of academia. In their recent vote, seven members voted to make the cut, while two members voted to reduce the cut further to 3.75%.
Given the continuing turmoil in the UK economy, the Bank of England’s most recent action was not unexpected. Inflation external factors, such as Russia’s invasion of Ukraine, have had a huge impact on the economic landscape and have played a major role in causing that first inflation spike. The committee voted unanimously on an extremely dovish monetary policy course. Members expressed their concerns about new inflation data, which continues to show persistently high inflation.
It’s important that we take an equally considered path in the months and years ahead.”
“Although we expect inflation to return to our 2% target, we’re not out of the woods yet, so any future cuts will need to be made gradually and carefully,” – Governor Andrew Bailey.
The new Labour government hopes to increase economic, after coming to power in a landslide victory last autumn. They are counting on quicker and deeper interest rate cuts to provide the widespread relief the economy so desperately needs. Yet, according to opinion polls, the government is doing poorly and would need an upturn in economic fortunes to help them out.
The Monetary Policy Committee next meets in November. If they continue with their preferred choice of action, they should start to plan for a second round of cuts. Suren Thiru, economics director at body for accountants ICAEW welcomed the committee’s call for a cautionary approach.
“Rate-setters will likely want to assess the impact of any measures announced in the budget before loosening policy again, leaving December as the earliest point at which they may consider cutting rates,” – Suren Thiru.
The other five members of the committee so far have been keenly attuned to the trends in inflation. They all know that it’s conceivable to get there, but doing so will require vigilant oversight and prudent policymaking in the months ahead. These continued cuts will free up resources to provide needed support for economic stabilization and long-term growth in a very challenging state and national environment. In parallel, the new Labour government is looking for every opportunity to restore their public approval.
