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Bank of England cuts base rate to 5% in split vote; monetary policy to remain tight
Bank of England Governor Andrew Bailey admitted that the rate cuts were “not mission accomplished”.
The Bank of England’s Monetary Policy Committee (MPC) voted by a majority of 5-4 to cut the bank rate by 0.25 percentage points to 5% at its meeting ending on July 31, 2024. Four members preferred to keep the bank rate at 5.25%.
The MPC published updated forecasts for economic activity and inflation in the accompanying August Monetary Policy Report. In both May and June, 12-month CPI inflation reached the MPC’s 2% target. As the decline in energy prices last year has not reached an annual comparison, CPI inflation is expected to rise to around 2¾% in the second half of this year.
This will shed more light on the persistence of domestic inflationary pressures. Regular average weekly earnings growth in the private sector slowed to 5.6% in the three months to May, and services consumer price inflation eased to 5.7% in June. So far this year, GDP has rebounded sharply, but the underlying momentum appears to have weakened.
The Committee’s framework for assessing the medium-term inflation outlook distinguishes between first- and second-round effects. The MPC has been focusing on capturing second-round effects of more persistent inflation pressures. The Committee continues to monitor the accumulation of evidence from a wide range of indicators.
The Committee expects that the decline in overall inflation and the normalization of many measures of inflation expectations will continue to result in weaker wage and price-setting mechanisms. With GDP running below potential and further slack in the labor market, the economy should experience some slack. With monetary policy remaining tight, domestic inflation is expected to fade gradually over the next few years.
Taking all of the above into account, the Committee voted to reduce the Bank Rate to 5% at this meeting. It is appropriate to reduce the degree of policy restrictiveness slightly now. The impact of past external shocks has weakened, and some progress has been made in alleviating persistent risks to inflation. Despite stronger-than-expected GDP, the restrictive stance of monetary policy continues to weigh on real economic activity, leading to a looser labor market and holding down inflationary pressures.
Monetary policy needs to remain restrained for sufficiently long until risks that inflation can return to our 2 percent objective on a sustainable basis over the medium term dissipate further. The Committee will continue to monitor persistent risks to inflation closely and will decide at each meeting how restrained monetary policy should be.
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