Most economists had already predicted that the nine-member Monetary Policy Committee (MPC) would lower the base rate by a quarter of a percentage point to 4.50%. This unexpected move was followed by a surprising decision by MPC members to cut the rate by half a percentage point further, to 4.25%. The decision came as the Bank of England (BoE) announced a third halving of the base rate in six months, bringing it from a low of 4.75% to 4.50% in response to rising inflation in February.
Members of the MPC voted widely in favor of the cut, with the MPC head, Mr. Catherine Mann, expressing a pessimistic view about the accuracy of the indicators he had seen since the September prediction. However, two MPC members, Mr. Swti Dhingra and Catherine Mann, argued for a more aggressive reduction of half a percentage point to 4.25%, arguing that the economy was slowing faster than expected. This unexpected stance by these members asserted their concerns about further data releases concerning economic slowing.
The vote was far from decisive, with a 7-2 margin for the MPC to support the rate cut but heavily rejecting the stronger stance from the two members. The MPB also indicated that growth could eventually accelerate, perhaps hitting 3.5% by the end of the year. Although outlooks were less certain, the initial rate cut led to a surge in consumer price indexes (CPIs), the primary measure of inflation in the UK.
The BoE maintained that the surpriseacially resulted in a sharp decrease in the inflation rate, falling to 2.5% in the year to December, primarily due to easing price pressures in the “services sector,” which accounted for nearly 80% of the UK economy. The response from the BP, a leading economic bank, was strong, with the pound fall of 1% in the pound/dollar exchange rate likely to boost demand for the UK exports. This shift in themes came as BoE officials expressed confidence in the Bank’s ability to maintain low and stable inflation, vaulting the currency to buy in a weaker pound scenario.
Despite the surprise, the BoE and MPB have been clear that the rate cut signals, especially as they have occurred multiple times in the past, are not a trivial signpost of economic health. The unexpected stance from the MPC, together with the surging CPI and weak pound, has signals for a slow-down in the economy. This setup points to a potential recovery in the upcoming vote, with B P. set to decide whether to support the policy cut further or not.
