Economic Watch: Bank of England cuts interest rate to 2-year low in struggle to boost economy

The Bank of England cut rates to a two-year low of 4 percent in a split 5-4 vote amid economic slowdown, despite persistent inflation risks.

LONDON, Aug. 7 (Xinhua) -- The Bank of England (BoE) announced Thursday a cut to its benchmark interest rate from 4.25 percent to 4 percent, the lowest level in over two years, amid a struggle to boost the weakening British economy.

The BoE's Monetary Policy Committee voted 5-4 in favour of the quarter-point reduction in a second vote as opinions of its members split. Initially, four members backed a 0.25 percentage points cut, one favored a deeper 0.5 percentage points reduction, while four others voted to hold rates at 4.25 percent.

This move marked the BoE's third rate cut this year, and the fifth cut since August 2024, when it began easing from a 16-year high of 5.25 percent.

"Underlying UK GDP growth has remained subdued, consistent with a continued, gradual loosening in the labor market," said the bank in a statement, noting that a margin of slack has emerged in the economy. Downside domestic and geopolitical risks around economic activity remain, it added.

Substantial disinflation over the past two-and-a-half years has enabled rate cuts over the past year, with domestic price and wage pressures continuing to ease, according to the bank.

It cut rates despite June's consumer price year-on-year growth of 3.6 percent, the highest since January 2024, attributing it to temporary increases in food and energy costs. The bank expects inflation to peak near 4 percent in September before easing toward its 2 percent target.

Experts shared varied views when commenting on the bank's struggle to balance between bolstering economic activities and controlling inflation.

David Bharier, head of research at the British Chambers of Commerce, said businesses will welcome the decision, which marks a further move away from a prolonged period of elevated borrowing costs. With signs that the labor market is beginning to loosen and unemployment edging upwards, the bank is right to act to mitigate the risk of a deeper downturn, he said.

"With growth reducing in the past couple of months, fewer employees paying taxes and (U.S. President Donald) Trump's tariffs increasing global trade frictions, the BoE's rate cut is welcome but not enough," said Ashwin Kumar, director of research and policy at the Institute for Public Policy Research.

Inflation is expected to return to target, with risks to the economy and global growth over the next few years warranting a larger cut of 0.5 percentage points, Kumar said, adding that the bank has kept rates too high for too long.

However, John Bryson, professor in economic geography at the University of Birmingham, said that "the BoE is hoping that this reduction will drive growth, but growth that is not inflationary." He underlined that inflation in the country is still high and not under control.

People living in Britain will experience an increase in taxes towards the end of the year, he said. "This will deter households and companies from consuming and investing, and this then might limit inflationary pressures, but at the same time restrict economic growth."

British Chancellor of the Exchequer Rachel Reeves welcomed the rate cut. She posted on social media that the cut brings down the cost of mortgages and loans across Britain. "By bringing stability back to the country's finances, we're putting more money in people's pockets."

"Reeves is keen to see the government take credit for reducing interest rates and thus, in effect, mortgage costs. It does nothing for savers, of course, but that's not exactly the government's concern currently," said Ian Scott, a professor of the University of Manchester.

Scott said that Reeves may feel that if tax rises have to come in the autumn to keep the government's fiscal strategy on the rails, then a rate cut now -- and hence a reduction in mortgage costs at least for those renewing over the next six months or so -- is at least a little bit of relief should other taxes follow.

"Interest rates should be falling faster, but Labour's Jobs Tax and high borrowing have seen inflation almost double," British Shadow Chancellor Mel Stride said on X.

Interest rates are only coming down now to support the weak economy Reeves has created, and yet she is planning to do more damage with tax rises in the autumn, he said.■