This week, the Bank of England’s Monetary Policy Committee (MPC) did just that – and in a big way. Members voted unanimously to reduce their primary base rate by a quarter-point, lowering it to 4%. This step, which was already largely priced into financial markets, brings borrowing costs to their lowest point since March 2023. The MPC based its decision on a close 5-4 vote margin. This result is one of the closest ever since the Bank achieved independence over 25 years ago.
Governor Andrew Bailey characterized the decision as “finely balanced”. Yet, he understood the difficulties of tinkering with interest rates in an ever-evolving economic landscape. The MPC’s deliberation reflected a dual concern: while inflation had recently risen to 3.6% in June—higher than expected—there were indications of weak economic growth. These three factors combined to form a perfect storm making life more difficult for policymakers.
The dissenting votes came from Huw Pill and Clare Lombardelli, two of the four members who voted against the rate cut. They raised alarms about the consequences of increasing rates too quickly. Their dissent highlights the ongoing debate within the MPC regarding the best approach to managing inflation while fostering economic recovery.
External economist Alan Taylor had a profound influence on the rule of tone that clearly shaped the MPC’s decision-making. His insights contributed to the ongoing dialogue about the current economic landscape, where inflation, having peaked above 11% in late 2022, has recently declined but remains a pressing issue.
Chancellor Rachel Reeves initially welcomed the rate cut when it was announced saying it would help ease the burden on borrowers. She stressed that the stability gained through her government’s plans is why these sorts of monetary policy changes are now possible.
“The stability we have brought to the public finances through our plan for change has helped make this [rate cut] possible.” – Rachel Reeves
Indeed, business leaders expressed strong misgivings over Reeves’s autumn budget. They fear the new £25 billion increase in employer national insurance contributions, combined with a 6.7% national living wage increase, could force employers to make staff redundant and raise prices. This tension highlights the fine line that federal policymakers will need to walk between encouraging economic growth and suppressing inflation.
Even with the recent decrease in inflation, the UK economy is still in a challenging predicament. After the economy contracted in April and May, unemployment rates have slowly but consistently inched upward over the last few months. Bailey acknowledged these challenges, stating, “I do think the path continues to be down … the path has become more uncertain because of what we’re seeing.”
Inflationary pressures on food prices are still a major issue. As the Bank of England highlighted earlier this year, global agricultural commodity prices have a significant impact on domestic food price inflation. Increasing domestic labor costs are a key driver. This one-time insight is a reminder of the many layers of inflationary pressures on consumers.
“In addition to global agricultural commodity prices, domestic labour costs are currently an important driver of food price inflation.” – The Bank of England
Going forward, as the MPC steers the economy through today’s stormy waters, interest rate changes will probably be more guarded. Committee members believe recent trends suggest both that the case for cuts is as strong as ever. They intend to make those changes slowly and with close consideration of changing economic data.