Monetary Policy Committee lowers interest rates to 4.75% during today's meeting at the Bank of England.
The Bank of England's Monetary Policy Committee (MPC) made a move on November 3, 2022, by cutting interest rates by 0.25 percentage points to 4%. This decision was described as "finely balanced" with a narrow 5-4 vote among MPC members, reflecting division about how to manage sticky inflation amid a softening economy.
The rate cut was intended to provide the economy with a modest boost amid weak activity and labor market softness. The MPC aimed to be gradual and careful with further changes, signaling that rates might fall further, possibly to about 3.75% by year-end. However, future moves would depend on incoming data.
Inflation was still expected to be above target temporarily, but monetary conditions would ease to promote growth without losing control of inflation dynamics. The split vote underscored tension between controlling inflation and supporting economic growth, highlighting uncertainty in the economic outlook.
The MPC's decision comes in the wake of the Autumn Budget, which has created a bit of a hiccup, as some of the measures announced by Chancellor Rachel Reeves are likely to prove inflationary. The MPC committee appears to have discussed the Budget and its impact on the economy at length, with specific reference to the National Living Wage and employer National Insurance contributions.
According to widely-quoted research from the National Institute of Economic and Social Research (NIESR), UK inflation could be 3-4 points higher over the next two years if Trump imposes the tariffs that have been threatened. Interest rates could be 2-3 points higher as a result.
Economists at consultancy Capital Economics have adjusted their forecasts upwards by 0.2% and 0.1% in 2025 and 2026 respectively. Household energy prices went up at the start of October, when the Ofgem price cap surged by 10%. This will feed through into the October data.
Mortgage rates have been on the rise since the Autumn Budget and the US election. Variable-rate deals will come down on the back of today's news, but experts warn that the rate cut could actually lead to lenders hiking their fixed mortgage rates. The average two-year fixed mortgage rate is currently 5.40%, and the average five-year rate is 5.11%.
The next wage growth reports will be important too, as rising wages are another domestic driver of inflation. The independent Office for Budget Responsibility (OBR) expects Budget policy measures to increase inflation by 0.4 percentage points at their peak effect in 2026.
The MPC will announce whether they will cut interest rates or keep them on hold at their next meeting on December 19. The next two MPC meetings this year are tomorrow and December 19. The Bank of England's next meeting will take place on December 19. Services inflation also slowed from 5.6% to 4.9% in September, coming in comfortably below the Bank of England's 5.5% forecast.
Markets are confident that rates will be cut by 25 basis points tomorrow, taking the base rate to 3.75%. After Thursday's meeting, it is expected that the MPC will settle into a quarterly cutting cycle, with the next cut expected in February. The OBR's forecasts suggest that the economy will grow by 1.7% in 2023, 1.8% in 2024, and 2.0% in 2025. However, inflation is expected to remain above the 2% target until 2024.
In conclusion, the MPC's interest rate cut is part of a broader effort to stimulate the UK economy amid a challenging economic environment. The MPC will continue to monitor incoming data closely and adjust policy accordingly to maintain a balance between controlling inflation and supporting economic growth.
- The MPC's interest rate cut could potentially impact personal finance, as mortgage rates may decrease, but experts warn that lenders might increase fixed mortgage rates in response.
- The Autumn Budget's measures, such as the National Living Wage and employer National Insurance contributions, have raised concerns about their inflationary impact, adding to the MPC's focus on managing inflation.
- The Bank of England's decision to reduce interest rates could affect savings and investments, as well as business financing, due to the potential for lower returns on savings and potentially higher borrowing costs for businesses. Additionally, future tariffs imposed by Trump could further increase inflation and interest rates, potentially impacting both personal finance and business financing.
