Bank of England trims rates as inflation cools, uncertain outlook

In a split decision, the Bank of England‘s Monetary Policy Committee (MPC) has voted to lower the key Bank Rate by 0.25 percentage points to 4.75%, citing ongoing progress in lowering inflation despite persistent domestic price pressures.

The move marks the first rate cut by the Bank of England since late 2023, as policymakers look to balance the receding impact of earlier external shocks with the potential for lingering inflation risks at home. The decision was not unanimous, with one MPC member preferring to keep rates unchanged at 5%.

“There has been continued progress in disinflation, particularly as previous external shocks have abated, although remaining domestic inflationary pressures are resolving more slowly,” the Bank said in its policy statement.

Annual consumer price inflation (CPI) in the UK fell to 1.7% in September, down sharply from the double-digit levels seen throughout much of 2023. However, the MPC noted that CPI is expected to rise back towards the 2% target by the end of this year, with services inflation remaining elevated at 4.9%.

Easing inflation, lingering risks

“The Committee’s deliberations have been supported by the consideration of a range of cases that could impact the evolution of inflation persistence,” the statement read. These included scenarios where price and wage pressures dissipate quickly, as well as a possibility that “some inflationary persistence may also reflect structural shifts in wage and price-setting behaviour.”

The MPC’s latest forecasts, which assume a gradual removal of policy restraint, project CPI inflation returning to around 2% in the medium term as a modest margin of economic slack emerges. However, the outlook remains highly uncertain, with the impact of the government’s Autumn 2024 fiscal stimulus package a key unknown.

“The combined effects of the measures announced in Autumn Budget 2024 are provisionally expected to boost the level of GDP by around ¾% at their peak in a year’s time, relative to the August projections,” the Bank said. “The Budget is provisionally expected to boost CPI inflation by just under ½ of a percentage point at the peak.”

According to the minutes, the MPC will be closely monitoring the degree and speed at which these higher labour costs feed through into inflation, wages, employment and profit margins. The balance of these effects could sway the path of future policy.

“If, for example, the economy were to grow broadly as expected, but material downside news to wages and services inflation were nonetheless to emerge, this could increase the weight that the MPC would place on the first case materialising,” the Bank said, referring to the scenario of a rapid unwinding of inflation persistence.

Conversely, signs of a slowing disinflation process in the absence of stronger growth “could instead increase the likelihood that the MPC would place on the third case materialising” – where structural shifts in wage and price-setting sustain inflationary pressures.

Proceeding with caution

The lone dissenting vote on the rate cut came from external MPC member Catherine L Mann, who argued that “structural factors in wage and price-setting dynamics continued to draw out the underlying disinflation process.” Mann felt that CPI inflation would remain above target until the end of the forecast period, and that maintaining the current 5% Bank Rate would allow more time to assess the extent of these upside inflation risks.

The decision marks a continuation of the MPC’s cautious, data-dependent approach to removing monetary policy stimulus. While confident that inflation will ultimately return to target, policymakers remain acutely aware of the uncertain path ahead.

“Based on the evolving evidence, a gradual approach to removing policy restraint remains appropriate,” the Bank stated. “Monetary policy will need to continue to remain restrictive for sufficiently long until the risks to inflation returning sustainably to the 2% target in the medium term have dissipated further.”

The split vote and nuanced messaging underscore the tricky balancing act facing the MPC as it navigates the UK’s economic recovery. With growth moderating, inflation still elevated, and the impact of fiscal measures unknown, the path ahead is anything but clear.

Fintech firms and other businesses will no doubt be closely monitoring the Bank’s future policy decisions for clues on the trajectory of interest rates, inflation and the broader economic environment. For now, the MPC appears intent on proceeding carefully, keeping a tight rein on price pressures while leaving the door open for further easing if conditions warrant.

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