Why the Bank of England Just Cut Interest Rates Again
So, let’s talk about something that might sound kind of dry but actually affects a lot of people — the Bank of England’s decision to cut interest rates again , bringing them down to 4%. This is now the fifth cut in just one year, and it’s a move that’s raised some eyebrows, especially since inflation is still sitting above that target of 2%. So why do it?
Well, the short answer is: the economy needs a bit of a boost. Even though prices are still rising — especially food prices — the Bank is looking ahead and trying to balance things out before the situation gets worse. There’s been a slowdown in the jobs market: job vacancies have gone down, unemployment has ticked up slightly, and that means the pressure pushing prices higher through wages may be starting to ease. Essentially, less hiring and slightly more people looking for work can reduce the risk of spiraling inflation.
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But this decision wasn’t exactly a slam dunk. In fact, it was so close that a second vote had to be held — something that doesn’t happen often. Some top officials, like the deputy governor and the chief economist, actually voted against cutting rates this time around. Even Andrew Bailey, the governor, admitted that there’s now more uncertainty about how quickly interest rates will be lowered in the future.
Now, you might be wondering: if rates keep dropping, shouldn’t the economy be bouncing back by now? Good question. The truth is, growth has been pretty sluggish. The Bank only expects GDP growth of 0.1% for the second quarter, which is barely moving the needle. Things might pick up slightly in the third quarter — they’re predicting 0.3% growth — partly due to a new UK-US trade deal helping out exports.
But there's still a big issue: consumer spending. Even though people are earning more, they’re saving a lot instead of spending. Savings are still stuck at unusually high levels, kind of a leftover from the pandemic. That’s likely because people still feel unsure about where the economy is heading, especially after months of gloomy messaging from the government and previous high interest rates.
So yes, interest rates are lower, and that might help people with tracker mortgages or those looking to borrow. But for savers, it’s not great news — returns are likely to drop. Meanwhile, food prices are still expected to rise, and there’s the added pressure of government policies like higher National Insurance for employers and increases in the national living wage, both of which could keep inflation stubborn.
Bottom line? The Bank of England is trying to walk a tightrope: help the economy grow without letting inflation get out of hand. But judging by the split vote and the caution in their tone, it’s clear this is going to be a tricky path forward.
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