Beware the narcissism of small differences. On Thursday, the Bank of England cut UK interest rates by 0.25%, reducing the base rate from 5.25% to 5%. This is not a large cut. It was narrowly approved by a single vote, five to four, on the Bank’s monetary policy committee. It is not expected to be the first of a cascade of similar reductions. It cannot therefore be claimed as marking a real turning point for Britain’s economy.
Instead, the cut marks a milestone along the road and a cautious reversal, welcome as far as it goes, after four years of heightened rates in the wake of the pandemic and, in particular, the shock to energy prices caused by Russia’s invasion of Ukraine. It follows a similar reduction by the European Central Bank in June. And it came a day after the Federal Reserve hinted that it could cut US rates in September.
The Bank of England’s cut is another piece of evidence that central banks are a little more confident that the worst of the post-pandemic inflation, and the cost of living crisis it triggered, are over. But that confidence remains conditional. The Bank governor, Andrew Bailey, went out of his way on Thursday to stress that inflation may be about to tick upwards later this year before declining again. That implies that there may be no more than a single further rate cut in 2024.
The cut will not help savers. But it will relieve businesses that borrowed to see themselves through the energy cost spike. The larger reality for both businesses and households remains tough, since interest rates will remain high by earlier standards for many months to come. It is easy to forget that, as recently as December 2021, the rate stood at a minimal 0.1%. Within less than two years this was repeatedly raised to reach 5.25% in August 2023, where the rate remained until Thursday.
The cut is encouraging rather than transformative news for those who are trying to get into the housing market. For those who are in that market already, it makes a bit of difference, but not much and, in some cases, none at all. For those on tracker mortgages, housing costs will fall in line with the rate cut. For those on higher fixed rates, costs will remain the same as before. For those on lower fixed rates, and whose mortgages are due to expire soon – roughly a third of borrowers – costs will soon rise steeply.
Rishi Sunak tweeted on Thursday that the rate cut was proof that Labour has inherited a strong economy from the Conservatives. This is fanciful stuff. The cut indicates a slowly improving economy that remains hampered by low growth, low investment and cuts to public spending. The rate cut is, though, a boost to Labour, in the sense that it plays to its commitment to kickstart economic growth. That process was given a further boost Thursday, when the bank said that the recently announced pay awards in the public sector should not prove to be inflationary.
The importance of this cut should therefore not be exaggerated. This will probably be a vain hope, given that economic management was so central to the recent election, and that it remains a defining partisan battleground. All the same, these are political battles over fine margins, and they offer little respite to businesses and households that are still struggling to cope with the real costs of the real economy.