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The Bank of England has cut interest rates for the first time in four years after inflation fell back to normal levels earlier this year.
Rates had been at a 16-year high of 5.25 per cent since last summer – but on Thursday they finally started to come down.
But what does the decision mean and what will happen to the economy now?
What has happened to interest rates?The Bank of England’s Monetary Policy Committee (MPC) cut the base interest rate to 5 per cent, a quarter point reduction on August 1. It is the first time it has brought interest rates down since 2020 and ends a year-long stretch of rates being held at their highest point since the 2008 financial crisis.
But it was a knife-edge decision. Only five out of nine committee members wanted to cut and the Bank’s chief economist, Huw Pill, was one of the four who voted to keep rates at 5.25 per cent.
Andrew Bailey, the Bank’s governor, and Clare Lombardelli, the newly appointed deputy governor for monetary policy, voted in favour of the cut.
Clare Lombardelli, the Bank’s new deputy governor for monetary policyWhat does it actually mean?Hikes in recent years have meant mortgage rates have been much higher than was normal for most of the last decade.
How much it will actually affect mortgage prices on offer is up for debate because they had already started falling this summer in anticipation of a rate cut.
Richard Donnell, executive director of research at Zoopla, said it will give a “further confidence boost to the housing market rather than heralding the start of a big drop in mortgage rates”.
Read MoreSponsoredThe base rate also dictates the interest rates offered by banks on savings accounts, meaning these are also likely to fall.
We need to put the period of high inflation firmly behind us. And we need to be careful not to cut rates too much or too quickly
Andrew Bailey, Bank of England
What about inflation?Raising interest rates is the central bank’s main way of reducing inflation – the measure of how fast prices increase over time.
The main inflation figure, which covers the whole economy, fell back to the Bank’s target of 2 per cent in June, prompting calls for interest rates to come down again. But the committee has been cautious about cutting rates until now because prices have continued to rise quickly in areas like the services industry.
Mr Bailey said on Thursday that Britain has “truly come a long way in returning inflation to target”.
He added that policymakers must be “highly alert” to signs that inflation might increase again. He added: “We need to watch this very carefully.”
Will rates continue to fall now?The MPC, which makes rate decisions, is due to meet three more times this year.
Mr Bailey did not rule out cutting rates again at the next meeting in September, but set the scene for a slow-and-steady approach.
He said: “We need to put the period of high inflation firmly behind us. And we need to be careful not to cut rates too much or too quickly.”
What has the Government said?Chancellor Rachel Reeves welcomed the cut but warned “millions of people are still paying higher mortgage rates” following the 2022 mini-budget under Liz Truss.
She said: “Homeowners will welcome this cut in interest rates but I know that millions of people are still paying higher mortgage rates after the Conservatives mini-budget less than two years ago that sent interest rates and mortgage rates soaring.
Meanwhile, former prime minister Rishi Sunak said it was “good news for homeowners and shows Labour inherited a strong economy”.
Rachel Reeves welcomed the cut to base rateDoes this mean the economy is doing well?Mortgage rates are still high but a cut to the base rate is good news for the housing market. It also indicates that the Bank thinks inflation is under control.
That is a small positive for consumers, as it means prices on everyday shopping items are rising more slowly than before.
The Bank’s latest economic report indicated that gross domestic product – the main measure of economic growth – is set to grow more than previous estimates this year.
It is a complicated picture but Mr Bailey said: “Inflationary pressures have eased enough that we’ve been able to cut interest rates today.”
What do other people think of it?The general secretary of the Unite trade union criticised the interest rate decision as being “too little, too late” for working families and urged more cuts.
Sharon Graham said: “Interest rates still stand at historic highs and this small cut will offer little help to workers struggling with the cost-of-living crisis and record housing costs.”
Meanwhile, Alpesh Paleja, interim deputy chief economist of the CBI business group, said: “At best, there is only mixed evidence that inflation persistence has been defeated.
“While the labour market is loosening and wage growth slowly easing, the unexpected strength in services inflation remains a red flag.
“We still think that today’s meeting marks the start of a rate-cutting cycle but the pace of this is now more uncertain.”
