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The Bank of England has opened the door to rate cuts in August.

The Bank of England has opened the door to rate cuts in August.
The Bank of England has opened the door to rate cuts in August.

 


11 hours ago

ByDearbail Jordan and Faisal Islam, business reporters and economics editors

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The Bank of England opened the door to interest rate cuts in August, which would mark the first decline in borrowing costs in more than four years.

On Thursday, the bank voted to keep interest rates at 5.25%, the highest in 16 years, in a final decision.

Earlier this week, figures showed inflation, which measures the pace at which prices rise, slowed to 2% in May. This figure is in line with the Bank of England target. However, prices of some items continued to rise faster than expected.

However, minutes of the Bank's rate-setting committee meeting signaled a significant shift in sentiment, indicating that a majority may vote for a rate cut when it meets again on August 1.

He said he would look into whether the areas of concern are decreasing.

Based on this, how long the committee will continue its review. [the] “Bank interest rates should be maintained at current levels,” the minutes said.

While it's not a done deal, the language is a clear signal to markets and the public that a rate cut is now the most likely outcome at its next meeting after the bank completes its new forecasts for the economy.

The rate-setting committee voted 7-2 to keep rates unchanged, but the results were as cut and dry as before. For the three members, voting this month was a balanced decision.

Committee members known to be leaning toward a cut, including Bank of England Governor Andrew Bailey, are downplaying the strength of underlying inflationary pressures.

The Bank of England's latest decision comes ahead of the general election, with policy for the future of the UK economy becoming a key battleground for the political parties.

But the bank stressed that the timing of the election was “not relevant to the decision.”

Bank of England interest rates affect the mortgage, credit card and savings rates of millions of people across the UK.

Many homeowners currently exiting fixed rate deals are facing much higher mortgage rates than they used to, although banks appear to be hinting at a cut in August.

The current average interest rate for a two-year fixed contract is 5.96%, but this is lower than last year's peak of 6.86%.

People crying over mortgage costs

Ben Perks

Ben Perks said he was disappointed and frustrated with the interest rate decision.

Ben Perkes, a mortgage adviser based in Wolverhampton, told BBC Radio 5 Live: “I'm not surprised by the bank's decision to keep rates unchanged, but I'm certainly disappointed and frustrated.”

“It’s okay to say, ‘Oh, I’ll wait’, but the reality is that 125,000 people a month are coming to the end of their fixed rate – that’s the population of Wolverhampton city center for two months.”

He said some borrowers were in tears in his office when they found out how much their loan payments would increase.

“It's very stressful. We've had meetings where they're talking about new payments and everything else has gone up and they don't know which way to go.”

Wednesday's inflation data showed that increases in service prices, which reflect the cost of items such as movie tickets, restaurant meals and vacations, remained higher than expected.

However, the bank's minutes showed that the slow decline in services inflation reflected one-off factors such as minimum wage increases and bills such as broadband internet and mobile that automatically rise in line with inflation.

If the bank goes ahead with the rate cut in August, it would be the first rate cut since March 2020, when the UK entered its first COVID-19 lockdown.

“It is good news that inflation is back to our 2% target,” said Andrew Bailey, the bank's governor.

We need to be confident that inflation will remain low, which is why we have decided to keep interest rates current at 5.25%.

The Bank of England is independent from the government and its main role is to keep inflation stable at 2%.

In response to high inflation, banks have raised interest rates and kept them high in recent years.

The theory behind raising interest rates is that it will slow inflation, but it may also slow economic growth because businesses may delay investing or hiring, which could lead to less job creation.

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