The Bank of England has reduced its key borrowing rates by 25 basis points to 4.5%, a move decided by the Monetary Policy Committee (MPC) on Thursday. This decision, which was unanimously supported by all MPC members, has surprised investors with its ultra-dovish commentary. Notably, two committee members, Swati Dhingra and Catherine Mann, had advocated for a more significant reduction of 50 basis points. The central bank's decision comes amid a temporary rise in price pressures due to surging energy prices, projecting a short-lived acceleration in the Consumer Price Index (CPI) to 3.7% before returning to the target path of 2%.
In light of recent economic developments, the Bank of England has revised the UK's GDP growth for the current quarter downward from 0.4% to a modest 0.1%. The decision reflects the bank's response to a weak economic outlook and disappointing data from the United States. Despite traders already anticipating a 25-basis-point rate cut, the MPC's dovish tone added an unexpected twist, leading to a sharp reaction in the market.
The MPC's vote concluded with an 8-1 majority, with one member dissenting. The Bank of England's monetary policy report indicates a projected decline in the UK's growth rate by an additional 0.1% in the last quarter of 2024. This marks a downward revision from the prior projection of 0.3% economic expansion made in November. The decision underscores the central bank's concern about the fragile state of the economy and its aim to stabilize financial conditions.
The central bank's decision to lower interest rates also reflects its anticipation of temporary inflationary pressures. While energy prices have contributed to a temporary increase in price levels, the Bank of England remains optimistic that the CPI will eventually return to its targeted path of 2%. This projection aligns with the central bank's long-term strategy to maintain price stability and support economic recovery.
Following the rate decision, the GBP/USD currency pair experienced a notable decline, trading deep in negative territory near 1.2400. This market reaction highlights investor concerns regarding the UK's economic outlook and the implications of reduced borrowing costs. The decline in the currency pair underscores the challenges faced by the UK economy in navigating through uncertain economic conditions.
The Bank of England's decision was influenced by a combination of domestic and international factors. The weak economic outlook, coupled with disappointing data from the US, prompted the central bank to adopt a cautious approach. By reducing interest rates, the Bank of England aims to stimulate economic activity and provide support to households and businesses during this challenging period.