Bank of England's interest rate reduction

Commenting on the Bank of England’s (BoE) interest rate reduction to 5%, Chris Arcari, Head of Capital Markets, Hymans Robertson says:

“With the Bank of England 0.25% pa rate cut announced today, we think the key point is that the pace of rate cuts from here is likely to be very gradual given the current decent growth backdrop and stickiness in underlying measures of inflation.

“While headline inflation has been at the BoE’s 2% target in May and June, energy prices mean it is likely to rise in the second half of the year and is forecast to reach close to 3% by the end of 2024. Furthermore, recent data on GDP growth, services inflation, and wage growth have all exceeded the Bank of England’s forecasts recently, which, all else equal, weighs against the BoE cutting rates.

“Nonetheless, lowering rates need not mean adopting a stimulative stance – given falls in inflation, monetary policy has continued to tighten through 2024 via rising real rates, despite the last rate rise coming in August last year. Put another way, higher than expected, yet easing, underlying inflation pressures can be seen to be consistent with a gradual reduction in interest rates to slightly less restrictive levels over time.”