Summary:
The Bank of England decided last Thursday by a vote of 5 to 4 to cut the interest rate by 25 points to 5%, the first rate cut since March (2020). which is the first rate cut since March (2020).
Monetary Policy Report
The Bank of England voted overwhelmingly on August 1st to cut the interest rate. This is with the decisive vote in favor of the cut from Andrew Bailey (Governor of the Bank of England) and the Monetary Policy Report showed the following:
Consumer Price Index (CPI) inflation has fallen significantly since the May report and the MPC's target is 2% in May and June. In the meantime. commodity price inflation was slightly negative. reflecting previous declines in external cost pressures. while service price inflation remained elevated at 5.7%. CPI inflation is also expected to pick up to around 2.75% in the second half of the year. As the energy price index fell last year from the year-on-year comparison. revealing that domestic pressures remain dominant.
Activity has rebounded quite dramatically so far this year, stronger than the forecasts released in the May report, but the underlying momentum looks weaker. UK GDP is also expected to rise by as much as 0.7% in the second quarter, 0.4% in the third quarter, and 0.2% in the fourth quarter.
Despite this strong gross domestic product (GDP) growth, aggregate demand and supply have remained broadly balanced. The U.K. labor market is slowing, but is still fairly tight by historical standards, and the unemployment rate is expected to remain at 4.4% over the coming period before rising modestly. By the end of 2025.
As for private sectors' average weekly ordinary weekly earnings (AWE), it has fallen again since the middle of (2023) but remained high at 5.6% in the three months to May. has fallen again since mid-2023 but remained elevated at 5.6% in the three months to May. The drop in short-term inflation expectations and the downturn in the labor market mean that wage growth is expected to fall significantly in the short term. It is also likely to fall to 4.8% in the third quarter.
The MPC has focused on the effects of the second round, which is picking up more and more of the ongoing inflationary pressures. The impact of external shocks has eased. and some progress has been made in mitigating the risks of persistent inflation. To balance these considerations. the Committee voted at this meeting in favor of lowering the Bank Rate to 5%. The Committee continues to monitor the risks of persistent inflation and will decide on the appropriate degree of monetary policy tightening at each meeting.
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