On November 7, 2024, the Bank of England's Monetary Policy Committee (MPC) reduced the base interest rate from 5% to 4.75%. This decision reflects the central bank's response to evolving economic indicators, particularly the recent decline in inflation.
Background
The UK has experienced a significant decrease in inflation, with the Consumer Prices Index (CPI) falling from 2.2% in August to 1.7% in September 2024, dropping below the Bank's 2% target.
This decline has provided the Bank of England with the flexibility to lower interest rates to support economic growth.
Reasons for the Rate Cut
The decision to cut the base rate was influenced by several factors:
Easing Inflation: The notable reduction in inflation suggests that previous rate hikes have been effective, allowing for a more accommodative monetary policy.
Economic Growth Concerns: Indicators of a potential economic slowdown, including subdued consumer spending and business investment, prompted the need for measures to stimulate growth.
Global Economic Environment: International economic uncertainties, such as trade tensions and geopolitical events, have also played a role in the decision to adjust rates.
Impact on Inflation
Lowering interest rates typically encourages borrowing and spending, which can increase demand and potentially lead to higher inflation. However, the current inflationary pressures are largely supply-driven, stemming from factors like energy prices and supply chain disruptions. Therefore, the rate cut is expected to have a limited immediate impact on inflation, as the Bank anticipates these supply-side pressures to continue easing.
Future Outlook
The Bank of England has indicated a cautious approach to future rate adjustments. While the recent cut aims to support economic growth, any further changes will depend on upcoming economic data. If inflation continues to decline and economic growth remains modest, additional rate cuts may be considered. Conversely, if inflationary pressures re-emerge, the Bank may pause or reverse rate reductions to maintain price stability.
Effects on Borrowers and Savers
Borrowers: Individuals with variable-rate mortgages or loans may see a decrease in their interest payments. Prospective homebuyers and businesses seeking financing could benefit from more favourable borrowing conditions.
Savers: Interest rates on savings accounts may decline, leading to lower returns. Savers might need to explore alternative investment options to achieve desired returns.
Conclusion
The Bank of England's decision to reduce the base rate to 4.75% reflects its commitment to balancing economic growth with price stability. As the economic landscape evolves, the Bank will continue to monitor indicators closely to guide future monetary policy decisions.