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Lowering interest rates is most likely to be a gradual process

Inflation stayed above the Bank of England’s target level in the year to August

September 20, 2024 6:01 am

The Bank of England’s decision to hold interest rates at 5 per cent yesterday will have come as a surprise to nobody.
Following the release of figures that showed sticky services inflation rising further in August, markets signalled that they thought the already slim chance of a cut was even lower – and they were right.

The 8-1 majority for a hold was resounding – more emphatic than some economists had predicted.

It will require four of the nine-strong Monetary Policy Committee to see enough evidence in the next six weeks to change their mind if the market expectations of a cut in November are to be realised.

The notes produced by the Bank alongside the decision give a mixed picture. The Bank has downgraded its expectations for a rise in inflation in the coming months, but at the same time, it says that in the absence of “material developments” a “gradual” approach to rate cuts will be appropriate.

Some economists have said that two more cuts to interest rates this year – in the November and December meetings – is a distinct possibility.

It would be unwise to rule this out completely given there are 12 weeks and three inflation readings until the December decision, but the reality is that this is absolutely not a given, especially given yesterday’s hawkish vote.

Although the Fed – the US’s equivalent of the Bank of England – opted to cut rates by 0.5 percentage points on Wednesday, a more gradual unwinding of interest rates may end up occuring here in the UK.

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