Bank of England Cuts Interest Rates for First Time Since 2020, Signaling Cautious Shift in Monetary Policy

The Bank of England (BoE) has made a significant shift in its monetary policy, cutting its key interest rate for the first time since March 2020. On Thursday, August 1, 2024, the BoE reduced the rate by 25 basis points from 5.25% to 5%. This decision was reached by a narrow margin, with five members of the Monetary Policy Committee (MPC) voting in favor of the cut and four voting to maintain the current rate.BoE Governor Andrew Bailey emphasized the need for caution in this new phase of monetary policy. He stated, ‘We need to make sure inflation stays low, and be careful not to cut interest rates too quickly or by too much’. This cautious approach reflects the BoE’s ongoing concerns about inflation, despite it having reached the target rate of 2% for two consecutive months.The BoE’s economic forecasts suggest a slight increase in inflation to around 2.75% in the coming months, before it is expected to return to the 2% target by early 2026. This projected temporary rise is attributed to base effects from energy price changes in the previous year.This rate cut aligns the BoE with other major central banks that have begun cautiously lowering rates. The European Central Bank (ECB) cut rates in June, with expectations of further cuts in September. The U.S. Federal Reserve, however, has maintained its interest rates, but a rate cut is possible in September.The decision has had immediate impacts on financial markets, with some analysts predicting further cuts this year. ING, for instance, suspects that the BoE will ultimately cut rates faster than it is currently admitting, with potential cuts in November and December.As the BoE navigates this new phase of monetary policy, it remains committed to a data-dependent approach. The bank has stated that it will decide on the appropriate degree of monetary policy restrictiveness at each meeting while closely monitoring inflation persistence. This cautious stance reflects the delicate balance the BoE is trying to strike between supporting economic growth and ensuring price stability in the UK economy.

Key points

• The Bank of England cut its key interest rate from 5.

25% to 5%, the first cut since March 2020.

• The decision was made by a narrow 5-4 vote in the Monetary Policy Committee.
• BoE expects inflation to rise to 2.

75% in coming months before returning to 2% target by early 2026.

• Governor Andrew Bailey emphasized caution in future rate decisions.
• Some analysts predict further rate cuts in November and December.

Contradictions👾While the BoE has cut rates and some analysts predict further cuts this year, the BoE’s official stance remains cautious, emphasizing the need to ensure inflation stays low.