The Bank of England cuts interest rates

Please note: The article does not constitute advice or any form of investment recommendation. All numbers quoted were sourced from Bloomberg data as of 1 August 2024. Past performance is never a guarantee of future performance.

The Bank of England’s Monetary Policy Committee (MPC) announced its first interest rate cut in more than four years, taking rates from 5.25% to 5.0%. With rates previously held at a 16-year high since August 2023, the decision will be welcome news for many borrowers and homeowners. 

While interest rate cuts have been seen as a possibility for some months, there was genuine uncertainty among economists and investors in the run-up to today’s meeting, with markets pricing in less than a 60% chance of cut on the day. 

A finely balanced decision

Members of the MPC were similarly divided on whether a cut was necessary – with five in favour and four voting for no change. Their challenge has been to unpick some divergent trends in the inflation picture.  

While headline inflation hit the Bank of England’s 2% target for two consecutive months, it is expected to pick up again later this year due to higher energy prices. Services prices have also remained above the central bank’s forecasts, growing at an annual rate of 5.7%, while wage growth is still outpacing inflation. 

On the growth side, the UK economy has been stronger than expected in recent months (albeit still relatively weak), but softer labour market data and disappointing retail sales point to a more mixed outlook. 

Inflation risks remain

On balance, the MPC took a more positive stance on inflation in opting to cut rates. However, the tone of its accompanying statement was notably cautious, noting that inflation risks have not fully subsided: “Domestic inflationary persistence is expected to fade away over the next few years, owing to the restrictive stance of monetary policy. However, there is a risk that inflationary pressures from second-round effects will prove more enduring in the medium term.”¹

The statement also referred to the cut as a reduction in restrictiveness, rather than monetary easing: “It was appropriate to reduce slightly the degree of policy restrictiveness. The impact from past external shocks had abated and there had been some progress in moderating risks of persistence in inflation.”² This careful wording suggests a reluctance to commit to any further cuts for now.  

The Bank of England is not alone in its cautious mood. The US Federal Reserve chose to keep interest rates on hold again at its meeting this week, but signalled a September rate cut is a possibility if the data continues to improve. The European Central Bank already made the decision to cut back in June, but kept rates on hold in July amid worries about services inflation in the region. 

Looking ahead

The question many will be asking is whether there are more cuts to come, or if this is a case of ‘one and done’. Bank of England Governor Andrew Bailey answered this directly at today’s press conference, saying he has no view on the path of rates and that the decisions would be taken meeting to meeting. He was very clear on the need to avoid cutting rates “too quickly or too much”³ to ensure inflation remains contained. 

Markets are taking a more optimistic view and are currently pricing in two additional rate cuts by the end of this year. We expect the MPC to keep rates on hold at the next meeting in September, before cutting them to 4.75% in November. However, any decisions will depend on how the inflation and growth outlook evolves, and a lot could change in the months ahead. As ever, we will keep you updated on any new developments. 

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