BOE cut Interest Rates to 5% but markets sell-off

This morning the Bank of England announced the first cut in interest rates since before the pandemic. The cut from 5.25% to 5%, the first drop since March 2020, is considered to be an important indicator of economic stability after years of rising inflation has fuelled a cost of living crisis. But while the cut is good news for homeowners and business owners, the Governor of the Bank of England advises caution.

The decision to drop got through the committee on a 5-4 majority. BOE Governor Andrew Bailey is clear that he wanted to avoid cutting ‘too quickly or by too much’. The decision is being led by inflation holding the 2% target it hit in May, the lowest rate in 3 years, and a considerable decline from the 11.1% peak in October 2022. Inflation has been steadily declining since January, but forecasters expect another rise in the next few months. Core and service inflation, which does not include the fluctuations from food and fuel remains high, and winter always sees energy bills rise.

Despite claims from former Prime Minister Rishi Sunak that the public sector pay increases would put any future cuts in jeopardy, Bailey was clear to say that he expected it to have a ‘very small’ impact on inflation. Insiders stress it’s the private sector that plays a larger influence on wage inflation.

Speaking to the BBC, Bailey’s message was clear. While the cut is good news, it should not be considered as an indicator of more cuts to follow, despite the financial markets predicting a 75% chance of another cut in November following Chancellor Rachel Reeves' first budget. Decisions will be made on a meeting-by-meeting basis

Reeves welcomed the news of the cut. Homeowners on tracker mortgages will feel the benefits immediately. Bailey noted though that some may still be in for a shock in the future. Those on fixed-rate mortgages won’t see any impact and about a third of those agreed their rates when interest rates were around 3%. The BOE expects most of those loans to expire by the end of 2026, effectively meaning those homeowners are liable to see their rates go up not down.

Still, this move will be welcomed as renewed confidence in the economic bounce back and the hope that the ‘inflation dragon’ may finally be in retreat.

(Sources: bbc.co.uk)