Friday, 10th May, 2024 – Summer Rate Cuts May Be Coming
The Bank of England (BoE) has a committee called the Monetary Policy Committee (MPC) that meets regularly to set the official interest rate by evaluating economic conditions, inflation prospects, and its mandate to achieve price stability and support sustainable economic growth. The official interest rate is crucial because it influences the spending behaviors of individuals and businesses. Moreover, the actions of these financial participants can, in turn, impact the economy’s inflation levels.
Here is the news:
The Bank of England (BoE) held interest rates steady at 5.25% on Thursday but signalled that a rate cut could be on the horizon this summer if inflation continues to fall. Governor Andrew Bailey expressed optimism about the direction of inflation, noting “encouraging news” and expectations for it to approach the bank’s 2% target in the coming months. However, he emphasised the need for more evidence of sustained low inflation before implementing a rate cut. Dr Roger Barker of the Institute of Directors argued that the fragile UK economy justified an early rate cut, warning that the BoE needs to get ahead of the curve to avoid past mistakes. The head of savings at Shawbrook Bank, Adam Thrower, wrote on Linkedin that savers have “a window” before rate cuts to lock in rates with longer-term fixed accounts.
The official interest rate is the rate at which the central bank lends money to commercial banks or sets the cost of borrowing within the banking system. On the other hand, the inflation rate measures the general price level of goods and services in an economy over a specific period, usually expressed as a percentage.
When the interest rate is high, borrowing becomes less attractive for individuals and businesses, leading to reduced aggregate spending due to less cash on hand. This decrease in spending can lower aggregate demand below supply, prompting a reduction in prices to boost demand, thereby reducing inflation levels. Conversely, when interest rates are low, borrowing is encouraged, leading to increased spending. If demand surpasses supply, prices will rise, resulting in inflation. A general increase in prices across industries is known as inflation.
According to the news, the Bank of England (BoE) held the interest rate steady at 5.25% on Thursday, with inflation currently at 3.5% as of March. The ideal inflation rate is considered to be 2%. Increasing the interest rate further would likely decrease inflation, while lowering it would lead to increased inflation.
The Bank of England (BoE) recently signaled that a rate cut could be on the horizon this summer if inflation continues to fall. This suggests that the BoE is considering reducing the interest rate soon, aiming to keep inflation around the targeted 2%. However, timing is crucial, as emphasized by Governor Andrew Bailey. Rate cuts should occur when inflation is near 2% to prevent it from dropping below this target. Cutting rates too soon could risk destabilizing the economy.
Lastly, Adam Thrower advised savers that they have “a window” to lock in rates with longer-term fixed accounts before potential rate cuts by the BoE. This means that savers should take advantage of the current higher rates to secure a fixed-rate earnings account now, ensuring their returns remain unaffected by any upcoming rate reductions.
