Bank of England’s Tightrope: First Rate Cut Since Pandemic Amid Easing Inflation and Housing Market Optimism.
On Thursday, the Bank of England cut its interest rate for the first time in four years, but it was by the narrowest of margins. The cut took the UK’s benchmark interest rate to 5% from 5.25%, where it had stood since September, following the most extended running series of successive rate hikes in at least a century. Five of the nine members of the Bank of England’s monetary policy committee voted for a reduction in the rate, while four wanted to keep it on hold, showing that it was a knife-edge decision. It is still the highest it has been since April 2008.
UK inflation eased to 2% in May and remained at that level in June, edging toward the Bank of England’s target for the first time in nearly three years, as food prices fell sharply. “The impact from past external shocks has abated, and there has been some progress in moderating risks of inflation persistence,” the Bank of England said in a statement. “Although GDP has been stronger than expected, the restrictive stance of monetary policy continues to weigh on activity in the real economy, leading to a looser labor market and bearing down on inflationary pressures.”
It follows a decision by the US Federal Reserve to keep rates on hold at a meeting a day earlier. However, Fed chair Jerome Powell told reporters that a rate cut “could be on the table in the September meeting.”
The Bank of England’s first cut since March 2020 could boost sentiment in the housing market as mortgage costs fall. Primary lender Nationwide unveiled a sub 4% fixed-rate mortgage last week, with others likely to follow. “With a rate cut finally implemented, demand and transaction activity will pick up as the autumn market gets underway next month, and more mortgage rates fall below the 4% psychological threshold,” said Tom Bill, head of UK residential research at Knight Frank. The real estate consultancy sees UK house prices rising by 3% this year.
The closeness of the vote provides evidence that some BoE policymakers are still worried that the rise of inflation has not yet been fully tamed. Rising by 5.7%, inflation remained stubborn in the services sector, which is the most significant part of the economy. “Monetary policy will need to remain restrictive for sufficiently long until the risks to inflation returning sustainably to the 2% target in the medium term have dissipated further,” said the Bank of England. This cautious stance suggests that the central bank is prepared to maintain tight monetary conditions until it is confident that inflation is firmly under control.
Sources:
https://www.benoitproperties.com/news/nationwide-becomes-first-lender-to-offer-sub-4-mortgage-rate/
https://thenegotiator.co.uk/news/house-prices-rise-as-market-improves-says-big-lender/
