Bank of England cuts rates to 5% for the first time since 2020

From Morningstar: 2024-07-31 20:07:00

The Bank of England (BoE) has cut rates for the first time since March 2020. The Monetary Policy Committee had a close vote of five-four in favor of the rate cut to 5%. Although GDP has been stronger, the restrictive monetary policy is impacting the real economy and inflationary pressures.

Financial markets had anticipated a rate cut to 5%, but the decision was viewed as knife-edge due to sticky core inflation. Governor Andrew Bailey mentioned the need for caution in cutting interest rates too much or too quickly. The uncertainty was also influenced by the Federal Reserve’s decision to hold rates.

Andrew Summers expects a second rate cut in September due to downward pressure on services inflation and job market indicators. David Katimbo-Mugwanya notes market participants were not surprised by the rate cut. Policymakers remain cautious about service price changes and wage pressures.

As interest rates decrease, cash savings rates will likely decrease, but consumer debt may become cheaper. Equities may benefit more than bonds from rate cuts, with bond prices potentially increasing. The real economy could see a boost from lower rates, stimulating spending and GDP growth, but the effects are uncertain.

The unwinding of monetary policy could benefit businesses squeezed by supply chain inflation and low consumer confidence. The rate cut may help stimulate the economy, but the UK is still expected to face low growth. The exact effects of the rate cut will take time to become visible and quantifiable.



Read more at Morningstar: Bank of England Cuts Rates For First Time Since 2020