Bank of England (BoE) Cuts Policy Rate
The Bank of England made an important decision at its Monetary Policy Committee (MPC) meeting, lowering the policy rate by 25 basis points to 5 percent. This decision was supported by the votes of 5 members, including BoE Governor Andrew Bailey, while 4 members expressed their opinion in favor of maintaining the current interest rate. Thus, the BoE changed interest rates for the first time in a year and reduced the policy rate for the first time since March 2020.
The statement repeated that annual inflation reached the BoE’s target of 2 percent in May and June. In addition, inflation is expected to increase slightly in the second half of 2023. It was noted that economic growth has recovered with the decline in wage increases and service sector inflation.
While it was stated that the MPC continues to closely monitor signs of inflation, the following statements were made: “The MPC expects the decline in headline inflation and the normalization of many indicators of inflation expectations to continue to weaken wage and price-setting dynamics.” “As economic growth falls below potential and the labor market loosens further, a margin of slack will emerge in the economy. Due to the restrictive stance of monetary policy, domestic inflationary continuity is expected to disappear in the next few years.”
“It is appropriate to reduce the degree of restrictive stance”
The statement emphasized that there are risks to inflationary pressures stemming from secondary effects, and the following statements were used:
- “Balancing these issues, the MPC decided to reduce the policy rate to 5 percent at this meeting.”
- “It would now be appropriate to slightly reduce the degree of restrictive stance in monetary policy.”
It was stated that the effects of past external shocks have diminished and some progress has been made in reducing the risk of persistent inflation. It was stated that despite stronger than expected economic growth, the restrictive stance of monetary policy continues to put pressure on real economic activity, causing the labor market to loosen and reduce inflationary pressures. It was also stated that monetary policy should remain restrictive for a sufficiently long period until the risks of inflation returning to the 2% target in a sustainable manner in the medium term are further reduced.
“We should be careful not to reduce interest rates rapidly”
BoE Governor Andrew Bailey said inflationary pressures had eased enough to allow the policy rate to be lowered, adding: “However, we need to ensure inflation remains low and be careful not to cut rates too quickly or too much. Maintaining low and stable inflation is “The best thing we can do to support economic growth and the country’s well-being.”
The BoE began its tightening cycle in December 2021 with a 15 basis point increase in response to rising consumer prices in the country, raising interest rates to 0.25 percent. In 2022, it increased the policy rate by 25 basis points four times in a row, bringing the policy rate to 3.50 percent by the end of the year. Continuing its tightening steps throughout 2023, the BoE increased the policy rate in its first 5 meetings, reaching 5.25 percent. As of August 2023, the BoE kept the policy rate constant at 5.25 percent, the highest level in the last 16 years.
According to data from the British Office for National Statistics, headline inflation in the country reached the BoE’s targets with 2 percent in June, while service sector inflation was above expectations at 5.7 percent.
