The Bank of England has signaled that it may cut interest rates in August, the first reduction in borrowing costs in over four years. The bank voted to maintain interest rates at 5.25% in a close decision, following the news that inflation had slowed to 2% in May, in line with the Bank of England’s target. Although some prices continued to rise, the Bank’s rate-setting committee hinted that a majority could vote for a rate cut at its next meeting on August 1.
While not a definite decision, the committee’s language signaled to the markets and the public that a rate cut was now the most likely outcome after the bank completed its new forecasts for the economy. In a 7-2 vote, the committee opted to maintain rates, but three members found the choice was a “finely balanced” decision. The lean towards a rate cut is supported by Bank of England Governor, Andrew Bailey, who is playing down underlying inflationary pressures.
The impact of any interest rate cut would be felt by millions of people across the UK, with mortgage, credit card and savings rates all likely to be affected. However, the end of fixed-rate mortgages mean that many homeowners will be facing higher rates than they have become used to, with the current average rate for a two-year fixed deal at 5.96%.
Wednesday’s inflation data revealed that service price rises, covering items such as restaurant meals, holidays, and cinema tickets, remained higher than expected. According to the Bank’s minutes, the slow fall in service inflation is believed to reflect one-off factors, including the rise in the minimum wage and bills that automatically increase in line with inflation, such as broadband and mobile.
The last time the Bank of England cut interest rates was in March 2020 as the UK began its first Covid lockdown. Governor Bailey said that it was good news that inflation had returned to the bank’s 2% target, but added that the bank needed to ensure that inflation would remain low, hence the decision to hold rates at 5.25%. The bank is independent of the government, and its primary objective is to maintain stable inflation at 2%
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