The Bank of England (BOE) lowered the cash rate at today’s meeting by a quarter-point. This marks the second rate cut this year and brings the cash rate to 4.0%, its lowest level since March 2023. The British pound rose 0.50% after the rate decision.
The BOE’s decision to lower rates was widely expected but the breakdown of the Monetary Policy Committee (MPC) vote was a huge surprise. The MPC had to hold a second vote in order to reach a decision, which had never happened before.
In the end, the BoE decision was passed by the slimmest of margins. Out of nine MPC members, only five voted for a cut, with four favoring a quarter-point move and one voting for a deeper half-point cut. Four members voted to hold rates, which was a surprise as the markets had expected a larger majority for the quarter-point cut.
Governor Bailey tried to put a positive spin on the razor-sharp vote, calling the decision “finely balanced”. Bailey said that future cuts would be “gradual and careful” and warned that it was crucial not to lower rates too quickly or too much.
The close vote reflects the tensions that the BoE has to carefully navigate. The UK economy is sputtering as GDP contracted in May and June and the labor market is showing cracks as employers are cutting back on hiring due to higher payroll taxes and an increase in the minimum wages. At the same time, inflation, which hit 3.6% in June, has being moving higher and lowering rates will likely boost inflationary pressures.
The BoE had made inflation its number one priority. However, today’s rate cut shows that the central bank is very concerned about the UK economy and is willing to cut rates, even if the cost is a further bump upwards in inflation. The rate statement said that the BoE remains focused on returning inflation sustainably to its 2% target” but today’s move indicates that achieving the 2% goal will take time.
British Pound Climbs Higher, Stock Market Declines
The BOE rate cut has extended the British Pound’s rally against the US Dollar. The GBP/USD currency pair is up for a fifth straight day and is trading at 1.3422, up 0.56% on the day. The Pound has climbed 1.6% during the current rally.
Investors have reacted with a thumbs-down to the BoE decision. The FTSE 100, the benchmark UK stock index has declined 75 points (0.83%) on Thursday and is trading at 9088 points.
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Kenny started his career in forex working in the sales and marketing department at a major forex broker and has worked as a market analyst for 12 years. With a legal editing background, Kenny has combined his writing skills and finance expertise to produce top-quality articles. Kenny covers a wide range of topics, including global stock markets, commodities and currencies, with focus on fundamental and macro-economic analysis. Kenny’s articles have been carried by OANDA, Investing.com, Seeking Alpha and FXStreet. Kenny holds a Bachelor of Law from Ogoode Hall Law School in Toronto, Canada.
