business

Bank Of England Delivers Welcome Rate Cut Amidst Ongoing Budget Fallout

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The Monetary Policy Committee of the Bank of England has cut interest rates to 4.75%.

Anna Leach, Chief Economist of the Institute of Directors, said:

“Today’s 8-1 vote by the MPC to cut interest rates was as expected by markets and analysts, despite the bigger-than-expected fiscal loosening announced at the Budget. The Bank is in agreement with the OBR that Budget measures will lift inflation by just under 0.5% points and has otherwise not changed its forward guidance on interest rates. This may imply a view that inflation having been lower than expected in recent months is cancelled out by the inflationary impact of the Budget, alongside lingering concerns about inflation persistence.

“The Bank notes some uncertainty regarding the likely path for inflation and interest rates following the Budget. But the market reaction so far, as well as a higher pathway for inflation, imply tighter credit conditions for businesses and households. On balance, we look set for fewer interest rate cuts than might otherwise have been the case.”

Alpesh Paleja, Interim Deputy Chief Economist said:

“Today’s cut in interest rates is in line with the gradual loosening in monetary policy that the Bank of England has signalled so far. But while the worst of inflationary pressures are behind us, the Monetary Policy Committee is treading an increasingly fine line. On the one hand, the CBI’s surveys suggest that growth is already shifting down a gear. But on the other, some measures of domestic price pressures – notably services inflation – remain stubbornly high.

“That line has become even finer after October’s Budget. The loosening in fiscal policy is set to stoke inflation a little further, with the resulting short-term boost to demand not matched by a boost to supply potential. The rise in employer NICs will also only add to the cumulative cost burden for businesses, exacerbated by higher interest rates over the last few years.

“On balance, the MPC is still likely to proceed with more rate cuts going forward. But renewed inflationary pressures underscore that the pace will likely be gradual, with the prospect of a faster loosening in monetary policy now fading”.

Julian Jessop, Economics Fellow at the free market think tank the Institute of Economic Affairs, said:

"The Bank of England was right to cut interest rates again today but should move further and faster. Rates are still higher than necessary to keep bearing down on inflation, especially when the Bank is continuing to tighten policy by running down its holdings of government bonds.

"Indeed, a majority of members of the IEA’s Shadow Monetary Policy Committee voted to cut rates by a half a point rather than a quarter. Inflation is now back close to target and expected to remain there, but the full effects of past increases in interest rates and the deceleration of money growth have yet to feed through.

"The additional uncertainty and market volatility triggered by the Budget and Trump’s victory had prompted some to speculate that the MPC might hold off today. Delivering the rate cut that almost all had expected should therefore help to reassure households, businesses, and investors.

"The Bank has also endorsed the OBR view that the additional spending and borrowing in the Budget will provide a temporary boost to growth and inflation. This could slow the pace of rate cuts in future, though the Bank stuck to its guidance that rates will fall ‘gradually’ (perhaps a quarter point every three months, taking the Bank rate to 3.75% by the end of next year).

"However, the Bank’s forecasts are based on assumptions about the path of market interest rates which already look too optimistic. The increases in taxes and other business costs in the Budget, compounded by the hit to confidence, should also limit any upsides to growth or inflation.

"The Bank acknowledged the uncertainties here, implying rates could still be cut more quickly. But there is a clear risk that the MPC is too slow to respond."

TUC General Secretary Paul Nowak said:
“Today’s rate cut was the right decision, and the Bank of England should keep moving with further reductions.

“With inflation now below the government’s target ongoing cuts will support the economy and relieve cost of living pressures on households and businesses.

“It’s good that the Bank’s forecast has recognised gains to growth from October’s Budget.

“With increased investment, stronger public services and lower interest rates, the process of repairing and rebuilding Britain has begun.”