The Bank of England has cut its base interest rate for the first time in four years. The rate cut will be seen as a significant step as the economy looks to transition on from years of inflationary pressures. The timing is believed to be ideal for the new chancellor and government, with a robust pound helping to limit inflationary pressures from imports. The rate cut will provide some relief for homeowners and movers, but most will be on fixed-rate mortgages and are likely to face higher rates when these expire over the next few years.
Businesses can expect lower funding for investments, and the government’s borrowing forecasts should begin to improve. While consumer confidence may turn into positivity, few were brave enough to call it a certainty. The decision to cut rates was not unanimous, with Andrew Bailey, the Bank of England’s governor, leading a team of three members who voted in favour of the cut, while others still fear the enduring impact of recent energy and food price shocks.
The governor’s clear message was that there should be no expectations for consecutive cuts going forward. While there is scope for a further reduction below 5% later this year, the governor strives to avoid drastic cuts that could be too much for the economy to manage. Over the next few months, inflation is expected to rise slowly from the target of 2%, as service inflation and wage settlements remain high, although calmer.
The Bank of England was made privy to most of the chancellor’s spending announcements, including above-inflation public pay increases. So far, insiders suggest that the Bank seems relaxed, noting that it is private sector wages that are the benchmark for public sector wages, not the opposite. While the inflationary dragon appears to be retreating, it is nowhere near conquered. One cut has taken place, and other subsequent cuts should be expected over the next year, though the message to British consumers remains to tone down their spending while enjoying their summer
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