LONDON (AP) — The Bank of England has cut its main interest rate for the third time in six months with the British economy struggling to post any meaningful growth.
In a statement Thursday, the bank said the nine-member Monetary Policy Committee lowered its main interest rate by a quarter of a percentage point to 4.50%, taking it to its lowest level since mid-2023.
Seven of the members backed the cut, while the other two voted for an even bigger reduction of half a percentage point to 4.25%.
The base rate helps dictate how expensive it is for individuals to take out a mortgage or a loan, while also influencing the returns offered by banks on savings.
The latest cut reflects some concern about the outlook for the British economy, which has barely grown over the past six months. In forecasts accompanying the decision, the bank halved its growth projection for the British economy to 0.75%.
“It will be welcome news to many that we have been able to cut interest rates again today," said Bank Gov. Andrew Bailey. "We’ll be monitoring the U.K. economy and global developments very closely and taking a gradual and careful approach to reducing rates further. Low and stable inflation is the foundation of a healthy economy and it’s the Bank of England’s job to ensure that.”
The rate-setting panel is tasked with ensuring that inflation, as measured by the consumer prices index, hits a 2% target over the coming couple years or so.
Though inflation is standing at 2.5% and expected to rise in coming months, partly as a result of business tax increases from the new Labour government, most economists think it will then trend lower towards the target, hence the panel's ability to cut.
Treasury chief Rachel Reeves welcomed the cut but said she was “still not satisfied with the growth rate” and that the new Labour government will go “faster to kickstart economic growth.”
The Labour government, led by Prime Minister Keir Starmer, has said growth is its number one priority as it will boost living standards and generate funds for cash-starved public services. With growth proving elusive, the party's popularity has fallen sharply since its election victory.
Luke Bartholomew, deputy chief economist at abrdn, formerly Aberdeen Asset Management, said the fact two rate-setters backed a half-point cut despite an upward revision in the near-term inflation forecasts, “gives a sense of how concerned some policymakers are about the headwinds to growth.”
Inflation is way down from levels seen a couple of years ago, partly because central banks have dramatically increased borrowing costs from near zero during the coronavirus pandemic. Prices then began to shoot up, first as a result of supply chain issues and later because of Russia’s full-scale invasion of Ukraine, which pushed energy costs higher.
As inflation rates have declined from multidecade highs, central banks, including the U.S. Federal Reserve have started cutting interest rates, though few, if any, economists think that rates will fall back to the super-low levels that persisted in the years after the global financial crisis of 2008-2009 and during the pandemic.