UK (Parliament Politics Magazine) – Bank of England cuts interest rate to 4% but warns inflation may rise again, driven by food costs, possibly hitting 4% by September.
As reported by The Guardian, the Bank of England warned that rising food costs could push inflation to 4% as it cut interest rates for the fifth time in a year.
The Bank’s monetary policy committee reduced the benchmark rate to 4%, voting 5-4 to lower the key interest rate by 0.25 points.
The Bank of England has cut interest rates to the lowest level since March. For the first time ever, the committee voted twice before making the decision.
Andrew Bailey’s views on future rate cuts
Andrew Bailey, the Bank’s governor, stated,
“We’ve cut interest rates today, but it was a finely balanced decision. Interest rates are still on a downward path, but any future rate cuts will need to be made gradually and carefully.”
What did Threadneedle Street warn about rising inflation?
Threadneedle Street has raised concerns about inflation hitting households due to a surge in food prices. It also cited trade uncertainty and a slowing economy as major factors dragging down Britain’s recovery prospects.
The Bank has revised its outlook, forecasting inflation will rise to 4% by September, double the 2% official target. It expects inflation to ease below 3% by summer 2026, returning to target by 2027.
MPC’s stance on rising food prices
The MPC highlighted that supply chain disruptions caused by climate change were driving up global prices for essentials like coffee and chocolate.
It also pointed to rising prices, suggesting UK supermarkets were likely passing on increased staffing costs and new recycling fees, both introduced by the government.
The Bank added,
“In addition to global agricultural commodity prices, domestic labour costs are currently an important driver of food price inflation.”
What did business leaders say about Labour’s £25bn tax hike?
Business groups fear the chancellor’s planned £25bn rise in employer national insurance and a 6.7% living wage hike could trigger job cuts and price increases from April.
The latest data confirms a weakening economy, with contractions in April and May and inflation rising to 3.6% last month.
Why is Threadneedle Street split over interest rates?
Alan Taylor cast the decisive vote, citing ongoing weakness in economic activity and persistent inflationary pressures.
The independent MPC member had initially backed a 0.5% rate cut. He was an advocate for deeper cuts amid ongoing economic concerns. But eventually, he aligned with the narrow majority, including Governor Bailey, in favour of a 0.25% cut.
Revealing internal tension within the Bank of England, four MPC members voted against a rate cut. Among them were Chief Economist Huw Pill and Deputy Governor Clare Lombardelli, who backed no change.
Inflation has dropped sharply from its 11% peak in 2022, following Russia’s invasion of Ukraine. The decline has allowed the Bank of England to cut interest rates, though it warns that persistent inflation risks could block further action.
It added,
“The MPC judges that the upside risks around medium-term inflationary pressures have moved slightly higher since May.”
Rachel Reeves’ views on the interest rate cut
Rachel Reeves said the fifth interest rate cut since last year’s election is “welcome news, helping bring down the cost of mortgages and loans for families and businesses.”
She said,
“The stability we have brought to the public finances through our Plan for Change has helped make this possible and helped us become the fastest growing economy in the G7 in the first quarter of this year.”
Ms Reeves added,
“We’re locking in this growth in the long run by investing over £113 billion in infrastructure, securing three major trade deals and embracing the technologies of the future – to drive up wages and improve living standards across the UK.”
What did Mel Stride say about Rachel Reeves claiming credit for rate cuts?
The shadow chancellor, Sir Mel Stride, said,
“Rachel Reeves claims credit for interest rate cuts – but rates are coming down to support the weak economy she has created. Inflation has almost doubled on her watch, and unemployment is rising.”
He stated,
“Interest rates should be falling faster, but Labour’s Jobs Tax and reckless borrowing have pushed inflation well above target.”
Mr Stride added,
“With economists warning Labour has created a £50 billion black hole and the Chancellor refusing to rule out further harmful tax rises, Labour are showing they don’t understand the economy.”
What did Steve Vaid say about the impact of interest rate cuts on struggling households?
Steve Vaid, the chief executive at Money Advice Trust, said,
“The cut to interest rates will help people on tracker mortgages, and those looking to buy or remortgage. But for many struggling households, the bigger – and more worrying – picture is in the backdrop of this cut. Inflation, driven by increases in food prices, is directly hitting people’s pockets, being felt in the weekly shop and stretching some people’s budgets to breaking point.”
He stated,
“With significant uncertainty in the economy, and unemployment on the rise, struggling households are unlikely to feel much let-up as a result of this cut.”
Mr Vaid added,
“However, there is help out there. I’d encourage anyone worried about their finances to speak to a debt advice charity, like National Debtline, as early as possible. You can also contact your lender. While it can feel difficult, they are required to offer you support if you’re struggling.”