FILE - A woman walks in front of the Bank of England, at the financial district in London, on March 23, 2023. Inflation in the U.K. held steady at the Bank of England's target rate of 2% in the year to June, official figures showed Wednesday, July 17, 2024, in a development that could be enough for policymakers to cut borrowing costs next month. (AP Photo/Kin Cheung, File)
LONDON (AP) – The Bank of England has cut interest rates for the first time since the onset of the COVID-19 pandemic in early 2020.
In a statement Thursday, the bank said that by a 5-4 margin, its nine-member policymaking panel backed a quarter-point reduction in its main interest rate to 5%, from the 16-year of 5.25%.
Economists were divided as to whether the bank, which is independent of government, would cut rates given persistent price pressures in the services sector, which accounts for around 80% of the British economy.
Yet inflation in the U.K overall has already hit the bank’s target of 2%.
Interest rates in the U.K. have been unchanged for a year after a dramatic series of hikes but it’s been clear for a few months that the Monetary Policy Committee had been moving towards a cut.
“Inflationary pressures have eased enough that we’ve been able to cut interest rates today,” said Bank Gov. Andrew Bailey. “But we need to make sure inflation stays low, and be careful not to cut interest rates too quickly or by too much. Ensuring low and stable inflation is the best thing we can do to support economic growth and the prosperity of the country.”
Central banks around the world dramatically increased borrowing costs from the lows seen during the coronavirus pandemic when prices started to shoot up, first as a result of supply chain issues built up during the pandemic and then because of Russia’s full-scale invasion of Ukraine which pushed up energy costs.
Higher interest rates – which cool the economy by making it more expensive to borrow – have helped ease inflation, but they’ve also weighed on the British economy, which has barely grown since the pandemic rebound.
Critics of the Bank of England say it is being overly cautious about inflation and that keeping interest rates too high for too long will unnecessarily weigh on the economy. It is a charge that’s also been leveled against the U.S. Federal Reserve, which has also kept rates unchanged in recent months, but like the Bank of England is mulling over when to start cutting.
Some central banks, including the European Central Bank, have started reducing rates but are doing so cautiously.
