The Bank of England cuts interest rates for the first time in four years, avoids discussing the timetable for the next steps

Zhitong Finance APP learned that the Bank of England cut interest rates for the first time since early 2020 and signaled that it will further cautiously cut interest rates in the future, providing some relief to households in the UK that have experienced the highest borrowing costs in a generation for a year.

Bank of England Governor Bailey cast a decisive vote to cut the benchmark interest rate by 25 basis points to 5%. The meeting minutes show that this decision was a "subtle balance" for some members of the Monetary Policy Committee who supported the rate cut, while four members of the nine-member committee opposed the rate cut.

After the decision was announced, the pound fell against the US dollar, and UK bonds continued their earlier gains. Traders increased their bets on further rate cuts this year, expecting a cut of about 35 basis points by December.

The Bank of England did not provide specific guidance on where interest rates might stabilize or the pace of rate cuts needed to reach that level. The meeting minutes show that the Bank of England may only slowly reduce borrowing costs, and market expectations before the policy announcement indicated that the Bank of England would only cut rates once more this year.

Bailey said in a statement, "Inflation pressures have eased enough to allow us to cut rates today. But we need to ensure that inflation remains low and be careful not to cut rates too quickly or too much."

This rate cut aligns the Bank of England with the slow easing trend in developed economies.

Federal Reserve Chairman Powell said on Wednesday that officials would cut rates in September unless inflation progress stalls, and the Fed may soon join the rate-cutting camp. The Bank of England showed a cautious attitude towards changes in future borrowing costs, with the meeting minutes adding that officials will "decide on the appropriate degree of monetary policy constraints at each meeting."

Even so, the bank's forecasts suggest that the magnitude of rate cuts over the next three years will be larger than currently expected by the market. Based on market assumptions, rates are expected to fall to 4.1% in 2025, to 3.5% within three years, inflation will reach 1.7% in two years, and 1.5% in three years—far below the 2% target.

Athanasios Vamvakidis, head of G-10 FX strategy at Bank of America, said, "This is a hawkish rate cut. They just removed constraints rather than easing. I think this has limited impact on the pound. They made no commitments. They will decide at each meeting and continue to rely on data."

Although UK consumer price growth has returned to expected levels, potential pressures remain uncomfortably high. The Bank of England stated that by the end of this year, overall inflation will rebound to 2.7%, with subsequent developments depending on wage and service price changes.

The Bank of England stated in its documents that inflation risks will "tilt to the upside throughout the forecast period. Monetary policy needs to remain restrictive for a sufficiently long time until the risks of inflation returning to the 2% target in the medium term further dissipate." Despite the more challenging potential inflation and stronger-than-expected economic growth, the committee still decided to cut interest rates - both factors were mentioned by a few members who opposed the rate cut in the vote, making it the most intense vote by the Bank of England's Monetary Policy Committee since September 2023.

Data shows that the UK's service sector inflation rate in June was 5.7%, significantly higher than the Bank of England's forecast of 5.1%, and wage growth is only slowing down gradually.

The strength of the economic rebound from the recession is also greater than expected. The Bank of England raised this year's economic growth rate from 0.5% to 1.25%, but kept its forecasts for 2025 and 2026 unchanged at 1% and 1.25% respectively.

Minutes from the meeting show that the five members who voted in favor of the rate cut believed that "some progress has been made in mitigating the ongoing risks of inflation."

Business surveys indicate that "wage and price pressures are easing." For some officials, this decision is a "subtle balance" because inflation stickiness "has not yet completely dissipated."

Newly appointed Deputy Governor for Monetary Policy Clare Lombardelli supported the rate cut along with Bailey. Other officials who also supported this move include Deputy Governor Sarah Breeden, Dave Ramsden, and decision-makers Swati Dhingra.

Chief Economist Huw Pill and decision-makers Jonathan Haskel, Megan Greene, and Catherine Mann were more inclined to keep the interest rates unchanged. It is reported that this was Haskel's last vote. In June this year, only two members supported a rate cut.

St. James's Place's Director of Economic Research, Hetal Mehta, said, "This is clearly not a straightforward policy move, as evidenced by the voting differences and the subtle balance of many Monetary Policy Committee members. The pace of rate cuts will become part of more and more discussions, but large-scale and/or consecutive actions will be left for economic shocks."

For mortgage borrowers and businesses, after interest rates remained at a 16-year high for 12 months, this rate cut will be a welcome relief and will bring initial benefits to the new government.

Less than a month into office, the UK's new Prime Minister Starmar and his Chancellor of the Exchequer Rachel Reeves have promised to promote economic growth and repair the UK's ailing public services. Lower interest rates will help economic growth, reduce debt costs, and provide the government with more funds for its spending priorities.

The Bank of England received a briefing on the policy changes from the Chancellor of the Exchequer on Monday, when public sector workers received a £10 billion ($12.8 billion) pay rise, but officials did not include this in the August forecasts. The impact on the fiscal position will be reflected in the November forecasts after the full budget is announced on October 30th Although Rifes praised the interest rate decision as "good news," she pointed out in a statement that millions of families still face the problem of high mortgage rates, and reiterated a warning that "difficult decisions" are necessary to repair the UK economy