It wasn't the most anticipated decision, but it was certainly the most uncertain and in the end whoever bet on the scissors cut won. After the ECB, too the Bank of England distances itself from the Federal Reserve and cuts interest rates by 25 basis points, bringing them to 5% after holding them for a full year (from August 2023) to 5,25%, the highest level in 16 years. For the Boe it is the first rate cut since March 2020.
The return of inflation pushes the BoE to cut rates
The decision was not unanimous, but was taken by majority (five in favor out of nine) by the Monetary Policy Committee led by governor Andrew Bailey after the latest data had indicated a return of inflation within the 2% threshold, the lowest level in both the Eurozone and the United States. A decline, among other things, which is anything but obvious given that in August 2022 inflation had exceeded 11%.
“Inflation on a trend basis remained at the 2% target in both May and June,” reads the note from the Bank of England, according to which in the second half of 2024 prices will increase again to around 2,5%, “revealing more clearly the persistence of domestic inflationary pressures”. Precisely by virtue of these percentages, analysts were divided on the eve of the possible cut.
However, the Committee expects the decline in the consumer price index and the normalization of many indicators of inflation expectations to continue to influence the weaker dynamics of wage and price determination.
"Inflationary pressures have reduced to the point that we can cut rates today - added the governor Andrew Bailey, whose vote in favor of a cut was decisive -. However, we must keep inflation low and not cut too much or too quickly. Maintaining a low and stable inflation rate is the best way to support economic growth.”
The slowdown in price increases also affected the decision wages at the lowest rate in two years and unemployment at 4,4%, a higher level than expected. It should also be considered that, despite having officially emerged from recession, the British economy remains weak. The latest official data speak of zero growth in April and +0,4% in May.
“Today's cut is good news, but millions of families continue to pay high mortgage rates. This is why the Government is making difficult decisions to make the foundations of our economy sound after years of weak growth, so that we can rebuild Britain and improve conditions in every region of the country.” commented Chancellor of the Exchequer Rachel Reeves.
The market reaction
After the Bank of England's decision, the London's Ftse 100 drops more than half a percentage point, while the GBP loses ground on the dollar, reaching four-week lows. Instead, they continue to move broadly lower the other European Stock Exchanges, while Wall Street futures are rising led by the Nasdaq.
We remember that last night, as expected, the Federal Reserve left interest rates unchanged at 5,25-5,50%, but met analysts' expectations, paving the way for the September cut. “A reduction in the key rate could be on the table as early as the next meeting in September,” the Fed president said Jerome Powell during the usual post-meeting press conference. “We are getting closer to the point where it will be appropriate to reduce our policy rate, but we are not there yet.”
