In a bid to encourage a more upbeat outlook for the British economy, the Bank of England (BoE) on Thursday cut its benchmark interest rate to 5.0%, down from a 16-year high of 5.25%. The move, the first rate cut in more than four years, is aimed at providing additional relief to businesses and households still recovering from the economic fallout from the coronavirus pandemic and the conflict in Ukraine.
The decision comes as data suggests British manufacturers had a stronger July than their counterparts in Europe and Asia. Following the announcement, the FTSE 250 index, which includes mid-sized British companies, hit its highest point since February 2022, although it later succumbed to a decline amid concerns about the US economy.
The rate cut comes after a shallow recession in 2023 and is seen as a positive development for Prime Minister Keir Starmer, who has prioritised economic growth and improving productivity as key goals of his administration. Although the Bank of England’s chief economist, Hugh Bell, opted to hold rates, he acknowledged the improved economic outlook, which sees annual growth of around 1% between 2024 and 2026.
Michael Brown of Martin Currie, a division of Franklin Templeton, said the prospect of a Bank of England rate cut could help boost sentiment in the UK economy, with interest rate-sensitive sectors such as housebuilding, property, public services and, in particular, green energy favoured.
The rate cut was announced three days after Chancellor Rachel Reeves announced a massive public sector pay rise, aimed at doubling the UK’s economic growth rate to around 2.5% a year. However, the Bank of England’s Monetary Policy Committee’s 5-4 vote to cut rates highlights ongoing concerns about the risks of inflation.
Governor Andrew Bailey stressed that the Bank of England had no intention of embarking on a rapid series of interest rate cuts, suggesting that recent economic performance could keep inflation concerns at bay. Suren Thiru, economic director at the Institute of Chartered Accountants in England (ICAEW), said that while the rate cut represented a significant change in the direction of monetary policy, the financial challenges facing households and businesses remained largely unchanged.
At the moment, investors expect only one rate cut from the Bank of England this year. And even as wage growth nears 6%, double the rate that is typically in line with the central bank’s 2% inflation target, the BoE has significantly raised its forecast for UK economic growth in 2024 to 1.25% from 0.5% previously. That likely puts Britain ahead of France, Italy and Germany, and is due to a stronger start to the year rather than a revision to the long-term outlook.
The Bank of England’s growth forecasts for 2025 and 2026 remained unchanged at 1% and 1.25% respectively, less than half the average growth rate before the global financial crisis of 2007-08. In response to the rate cut, Reeves acknowledged the difficult road ahead, with borrowing costs continuing to squeeze many households and the public finances, which could necessitate tax increases in his next budget in October.
Reuters contributed to this article.
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