As anticipated, the Bank of England reduced their base interest rate on August 1 from 5.25% to 5%. The decision was a close call, with a majority of five to four voting in favour of the cut.
The Monetary Policy Report that accompanies the decision explains that while higher interest rates have helped return inflation to the Bank’s target of 2% and allowed them to make this cut, they are expecting a temporary increase to 2.75% later this year.
Why might inflation increase again?
The fall in household energy prices has been helping to bring inflation down, however as energy prices normalise, the downward pull they’ve been exerting on inflation will end. Prices for services, such as hotels and restaurants, insurance and rents for housing, on the other hand continue to rise at rates well above their past averages.
In addition, demand for goods and services this year have been higher than expected and this may contribute to higher inflation.
However, the Bank consider this to be a temporary situation and expect inflation to fall back to their target level next year.
Is another cut likely?
The Bank are prioritising making sure that inflation stays low and have said that they will not cut rates too much or too quickly. This suggests a further cut when they next meet on 19 September is unlikely.
What should you do about the rate cut?
Regardless of future decisions, the cut to 5% is good news for borrowers, but may not be so good for savers.
Commercial banks typically tend to follow the Bank of England, but not necessarily all to the same degree. If you have loan finance on variable interest rates, check to see that the interest rate reduces. Many loans and overdrafts have a rate that is tied to the Bank of England’s base rate so these should reduce automatically.
For savings it may be worth shopping around to make sure that you are getting the best rates on the market.
See: https://www.bankofengland.co.uk/monetary-policy-report/2024/august-2024
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