On 1st August, the Bank of England reduced its base interest rate from 5.25% to 5%, following a narrow vote of five to four in favour of the cut. This decision was accompanied by the Monetary Policy Report, which highlighted the factors influencing this move.
While higher interest rates have successfully brought inflation down to the Bank's target of 2%, a temporary increase to 2.75% is expected later this year. This potential uptick in inflation could be attributed to several factors:
- Normalisation of Energy Prices: The recent decline in household energy prices has contributed significantly to lowering inflation. However, as these prices stabilise, their deflationary effect will diminish.
- Rising Costs in Services: Prices in sectors such as hospitality, insurance, and housing rents continue to rise at rates above historical averages.
- Increased Demand: Strong demand for goods and services has exceeded expectations, potentially fuelling higher inflation.
The Bank of England views this as a temporary situation and anticipates that inflation will revert to its target level next year.
Future Rate Cuts:
The Bank has emphasised the importance of maintaining low inflation and has indicated that further rate cuts will be approached cautiously. Consequently, a further reduction at the next meeting on 19 September is unlikely.
Implications for Borrowers and Savers:
The reduction to 5% is generally positive news for borrowers, as commercial banks often adjust their interest rates in line with the Bank of England's base rate. If you have loans or overdrafts with variable interest rates, these should automatically reflect the new rate.
For savers, however, the outlook may not be as favourable. It is advisable to review your savings accounts and consider shopping around to secure the best available rates.
For more detailed information, you can refer to the Bank of England's August 2024 Monetary Policy Report.