The Bank of England cut interest rates to 4 per cent today amid amid growing concerns about the UK’s sluggish economy.
The Bank’s Monetary Policy Committee (MPC) reduced the base rate by 0.25 percentage points to 4 per cent at lunchtime.
This is the fifth reduction since August last year, when interest rates started steadily coming down from a peak of 5.25 per cent.
A cut will release pressure for mortgage holders and home buyers amid hopes that cheaper deals will enter the market if the Bank’s base rate is lowered further.
Prior to the announcement, economists had reckoned a slowdown in the jobs market and stagnant economic growth would prompt the MPC to slash rates on Thursday.
Data from the Office for National Statistics (ONS) showed the rate of UK unemployment increased to 4.7 per cent in the three months to May – the highest level for four years.
And average earnings growth, excluding bonuses, slowed to 5 per cent in the period to May to its lowest level for almost three years.
Bank of England Governor Andrew Bailey said earlier this month that the Bank would be prepared to cut rates if the jobs market showed signs of weakening.
ONS data showed the UK economy contracted in both April and May, further putting pressure on Threadneedle Street to ease borrowing costs.
Matt Swannell, chief economic advisor to the EY Item Club, said a 0.25 percentage point cut on Thursday was ‘almost certain’ amid a ‘sluggish’ economy.
Recent survey data, watched closely by economists, has indicated that firms are grappling with higher labour costs and wider geopolitical uncertainty weighing on investment plans, he said.
‘With the MPC balancing signs of fragility in the labour market against evidence of lingering inflationary pressure, the committee will likely signal that further gradual interest rate cuts remain appropriate,’ Mr Swannell predicted.
Sanjay Raja, senior economist for Deutsche Bank, said the economy has been ‘weaker than the MPC anticipated’ since it last published a Monetary Policy Report in May.
The jobless rate is slightly higher, wage growth has weakened, and redundancies have been elevated, he said.
However, he said the MPC will be ‘between a rock and a hard place’, likely leading to a split vote within the nine–person committee.
Other economists said they will be watching out for any comments from the Bank about the future path for interest rate cuts, which is more uncertain given the balance of risks to the economy.
Some policymakers may be more concerned by recent inflation data, with prices rising at the fastest rate in 15 months in June.
Rising food inflation has put pressure on the overall rate in recent months.
