Bank of England cuts interest rates but warns it's not 'job done'

The Bank of England has cut interest rates for the first time in four years, ITV News Economics Editor Joel Hills reports

It’s a cut, but a cautious one.

Twelve months after the last interest rate rise, the cost of borrowing is heading south again.

The Governor of the Bank of England, Andrew Bailey, proposed to reduce Bank Rate from 5.25% to 5%, and the Monetary Policy Committee (MPC) voted 5-4 for a change.

But there are two types of central bankers: those who think that the inflation problem of a year or two ago is receding - that the medicine of higher interest rates has done its job.

And those who worry that while the price of food and energy has stabilised, that pay growth in the UK is still too strong and the labour market too tight to conclude the fire is out and we are on the path to sustainably low inflation.

The result is a finely balanced decision.

The last time Bank Rate was at this level, just before the financial crisis, we ended up going very quickly from 5% to nearly 0%.

The Bank is stating clearly that is not the journey we are on today.

“Inflationary pressures have eased enough that we’ve been able to cut interest rates today. But we need to make sure inflation stays low, and be careful not to cut interest rates too quickly or by too much,” said Mr Bailey.

The cut is good news for households and businesses which have borrowed money and for the government, of course, which has the national debt to look after.

The MPC was briefed by the Treasury before the new Chancellor, Rachel Reeves, published the audit of government spending on Monday.

It takes the view that the large increase in public sector pay will not have a material impact on inflation or pay in the private sector.

As for the government’s assessment that it has the “worst [economic] inheritance since the Second World War,” the Bank has upgraded its forecast for growth this year to 1.25% - although it thinks the bounce will prove temporary.

The Bank remains more pessimistic than most other forecasters - including the Office for Budget Responsibility and the International Monetary Fund - about the growth potential of the UK economy.

The government is shooting for annual growth of above 2% in this Parliament - the Bank of England can’t see anything that healthy on the three-year horizon.

Labour says it has a plan to ”kickstart growth”. Perhaps the Bank will become more hopeful when we get the full details.

What happens next? If the Bank is right, the headline rate of inflation will edge up to 2.8% by the end of this year, as the downward pull of energy prices fades.

But note: by the end of the Bank’s forecast period, in September 2027, when the market is betting interest rates will be hovering around 3.5%, inflation is forecast to be well below target.

One way of reading this is that the market path is too high.

Anyone with a mortgage will be hoping this proves to be the case.

Roughly six million households have seen their monthly repayments surge in the last three and a half years.

The Bank points out that three million households are still paying mortgage rates of less than 3%, although most of these will be refinancing before the end of 2026.

We’re told interest rates are and will remain “restrictive” for the time being and yet house prices are growing and so is the economy. Meanwhile banks, like Barclays and Lloyds, report falling levels of bad debt.

The “bite” of Bank Rate at 5% doesn’t appear to be savage.

The cost of borrowing money is objectively far higher than it was, some are struggling but the fear that the sharp increase in interest rates we have experienced in the last few years would trigger a significant recession has proved to be unfounded.

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