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Why Bank of England is in no rush to lower interest rates – even though some think decision to wait is dangerous
Slowly does it.
That’s the overarching message to take away from the Bank of England‘s latest monetary policy decision. Unlike the Federal Reserve, the US central bank, which decided yesterday to cut interest rates by half a percentage point – more than many had expected – the Bank wanted to signal today that it’s in no rush.
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Alongside the decision to leave borrowing costs on hold at 5%, the Bank’s governor also signalled that he and the rest of the Monetary Policy Committee were in no rush to cut them again. Provided there aren’t any inflation surprises, he said, “we should be able to reduce rates gradually over time”. He added: “But it’s vital that inflation stays low, so we need to be careful not to cut too fast or by too much.”
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The Bank of England has held the base interest rate at 5%
Even so, the Bank is expected to carry on cutting rates in the coming months. Indeed, economists think the Bank will cut rates in November by at least a quarter percentage point, followed by more cuts next year, taking borrowing costs down towards 3% by next summer.
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That’s largely because inflation is now considerably lower than in recent years, and because there is evidence that high interest rates are starting to weigh down economic activity. The longer those rates stay high, the bigger the depressive impact they have on the UK.
But that raises another issue. For some economists, the Bank of England’s gradualist approach is dangerous. They worry that higher rates, which deter companies and individuals from spending and investing, are causing unnecessary damage.
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That helps explain why one of the MPC members, Swati Dhingra, voted to reduce rates at this meeting.
But the rest of the committee was of one mind – no point in rushing.
Whether they are right is something we’ll find out in the coming months.