Bank of England cuts interest rate to 5%, in first drop for over four years
1 August 2024, 12:02 | Updated: 1 August 2024, 12:35
The Bank of England has cut interest rates to 5% from a 16-year high of 5.25%.
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The Bank's nine-member Monetary Policy Committee voted to bring borrowing costs down on Thursday.
The base interest rate rose quickly from late 2021 to a peak of 5.25% last summer, before remaining there for 12 months.
The Bank has been battling to bring down inflation, which reached a peak of 11% in 2022, and has since fallen back to the target level of 2%.
Thursday's decision was the first time the committee has brought the base rate down since the start of the Covid-19 pandemic.
The government said the rate cut was "welcome news" but reiterated that it still needed to take "difficult decisions" to repair the UK's finances.
Read more: Blow for borrowers as Bank of England holds interest rates again at 5.25%
This echoes the Chancellor's comments earlier this week that she needed to raise taxes and cut spending to fill a £20 billion "black hole".
The Bank of England cautioned that interest rates will fall more gradually than they rose. Governor Andrew Bailey said that policymakers "need to make sure inflation stays low, and be careful not to cut interest rates too quickly or by too much".
He added: "Ensuring low and stable inflation is the best thing we can do to support economic growth and the prosperity of the country."
In its August meeting minutes, the Monetary Policy Committee said its stance will "need to continue to remain restrictive" to avoid inflation rising too much this year and next.
The pound fell against the US dollar and euro after the interest rates were cut. Sterling dropped 0.7% to 1.28 US dollars and was 0.3% lower at 1.18 euros.
Analysts said the decision would be a "turning point" that would be welcomed by people seeking a mortgage or looking to remortgage - but that interest rates would fall slower than they rose.
Alpesh Paleja, interim deputy chief economist of the CBI business group, said: "Today's decision to cut interest rates was on a knife-edge, as illustrated by the narrow majority of the Monetary Policy Committee voting in favour.
"At best, there is only mixed evidence that inflation persistence has been defeated. While the labour market is loosening and wage growth slowly easing, the unexpected strength in services inflation remains a red flag.
"We still think that today's meeting marks the start of a rate-cutting cycle, but the pace of this is now more uncertain.
"Several MPC members will be looking for more definitive signs of inflation persistence easing, to be swayed towards reducing rates further."
Paul Broadhead, Head of Mortgage and Housing Policy at the Building Societies Association, said: "Today’s cut in Bank Rate marks a turning point in what has been a very difficult two and half years.
"The news will be welcomed by many homeowners and aspiring first-time homebuyers.
"Whilst a 0.25% cut in the rate, to 5.00%, will not have a significant impact on the overall cost of mortgage payments, it is likely to boost to consumer confidence and lead to an increase in housing market activity."
Suren Thiru, Economics Director of the Institute of Chartered Accountants in England and Wales, said the decision would "provide much needed cheer" to people "grappling with onerous mortgage costs and to businesses trying to access the finance they need to grow."
But he added that the rate cut marks a notable shift in direction, the financial reality facing households and firms won’t materially change, as this is just one step back from the previous period of 14 rate hikes.
“The split vote decision among rate setters suggests this was a rather hawkish rate cut, so this policy loosening is unlikely to herald the start of a major interest rate-cutting cycle.
“With the bank forecasting that inflation will drift higher in the coming months, the Monetary Policy Committee is likely to put off lowering interest rates again until the end of the year.”
