Inflation fell back to the Bank’s 2pc target in May. However, the Monetary Policy Committee (MPC) said underlying price pressures remained strong, which suggested rates would “need to continue to remain restrictive for sufficiently long until the risks to inflation returning sustainably to the 2pc target in the medium term have dissipated further.”
A survey by the Bank’s agents showed average pay settlements had ticked up in recent months to 5.7pc, from 5.4pc at the start of the year.
Many employers said they remained “concerned” about the ongoing impact of a higher minimum wage, which the Government has said it wants to raise further.
Companies said they were already cutting hours and increasing non-pay benefits to come with the higher wage demands in order to hand bigger pay rises to their lowest paid staff.
The Bank’s latest forecasts also do not reflect a decision by Rachel Reeves to hand public sector workers pay rises worth £9.4bn this year.
While Thursday’s cut will be welcomed by the roughly 1.2m borrowers on fixed-rate mortgages, savers will lose out, with banks and building societies already cutting rates on some accounts.
The Bank also estimated that a third of the 8m mortgages “are still paying rates of less than 3pc”, with most of these deals expiring by the end of 2026. This suggests many mortgage holders are yet to feel the pain of higher rates.
The Bank also noted that the general election had dampened house buying, although companies said they expected activity to pick up again if borrowing costs fell.
The five-to-four split is the first in a year. The four members who voted to keep rates on hold, included Huw Pill, the Bank’s chief economist.
Mr Pill warned that rising wages remained a danger. “We recognise that there is a need for incomes to recover. But there is a limit to how far that process can go, because if it were to threaten that inflation begins to pick up again … that would mean higher interest rates,” he said.