Much of the country will celebrate the Bank of England’s decision to cut interest rates by a quarter of a percentage point to 5 per cent.
The belated move, after holding bank rate at 5.25 per cent for a year and a parade of 14 rate rises beginning in December 2021, will come as a blessed relief to consumers, people with mortgages, businesses and the Treasury.
The Government is the nation’s biggest borrower and lower interest rates reduce the cost of servicing the national debt.
The change will not be welcomed by everyone. There are more cash savers than borrowers.
Inflation, which peaked at 11 per cent, saw the value of those holdings diminished.
Mortgage relief: The Bank of England has cut interest rates by a quarter of a percentage point to 5% following a parade of 16 rate rises beginning in December 2021
It is only in recent months, as the cost of living subsided, that savers saw real returns on deposits.
One trusts that Governor Andrew Bailey is correct and the high street banks recognise the value to their own stability of paying decent returns on time deposits, encouraging savers to leave their money intact for a year or more.
Others less than overjoyed about the Bank’s action and the likely downward path of interest rates from now on include the Chancellor of the Exchequer. Lower rates should be good for Rachel Reeves’ growth agenda.
But in her response to the change the Chancellor couldn’t resist a reference to Liz Truss’s mini-budget, blaming it for mortgage pain.
Reality is that it was Covid-19 and Russia’s war on Ukraine which sent inflation and interest rates soaring in Britain and across the Western world.
Indeed, the Federal Reserve in the US has yet to bring rates down, and in Japan they are rising.
As for mortgage fixes, they were down a full point from their peak before the Bank acted and there should be more to come.
That may do more to get housebuilding going than deputy prime minister Angela Rayner’s determination to plough up the green belt.
Bailey has maintained for some time that UK (and European) inflation has been supply-side induced so the path of lower rates is easier to plot than in the US where consumers refused to stop spending.
At the August session the Governor did as required and led from the front, supported by a posse of Bank insiders including the new deputy governor Clare Lombardelli.
LSE associate professor Swati Dhingra, who has been urging rate cuts for months, has been heard.
She, rightly, has argued that monetary policy takes time to be effective.
Reference to the ‘persistence’ of inflation by tougher members of the Bank’s interest rate-setting committee are worrying.
They may fear that the Reeves effect, of generous public sector pay deals, could lead to a wage spiral.
This may have been too easily dismissed by Bailey. On the positive side, he argued that the current tension in the Middle East was less likely to lead to soaring fuel costs than in the past.
After the take-down of the Bank’s forecasting model by former US Federal Reserve chairman Ben Bernanke, it’s hard to regard its modelling skills seriously. The prediction of the longest recession known to mankind first became a 0.2 per cent average growth forecast for 2024 and has now been revised up to 1.25 per cent (still too negative).
Even less explicable is the 1 per cent output prediction for 2025, which is way below the Office for Budget Responsibility’s spring forecast of 1.9 per cent.
It takes little account of the momentum built in the first half of this year.
One only has to look at the raft of upbeat profit reports just released from leading engineer Rolls-Royce, Shell, the London Stock Exchange, and Barclays – and the dividends and share buybacks unleashed – to recognise optimism is returning after the big crises of the last decade.
If trend growth of 2 per cent to 2.5 per cent is to be fully restored then the Bank must lighten up and keep cutting.
Mojito trade
Here is something the City needs.
The son of a colleague just back from Barcelona delightedly discovered the Dow Jones bar.
The price of a favourite cocktail or spirit rise and fall each night on the basis of how many are purchased with big movers shown on a giant trading screens.
Cool!
DIY INVESTING PLATFORMS
AJ Bell
AJ Bell
Easy investing and ready-made portfolios
Hargreaves Lansdown
Hargreaves Lansdown
Free fund dealing and investment ideas
interactive investor
interactive investor
Flat-fee investing from £4.99 per month
Saxo
Saxo
Get £200 back in trading fees
Trading 212
Trading 212
Free dealing and no account fee
Affiliate links: If you take out a product This is Money may earn a commission. These deals are chosen by our editorial team, as we think they are worth highlighting. This does not affect our editorial independence.