The Bank of England’s Monetary Policy Committee (MPC) has slashed interest rates to 4.5%, the lowest level since June 2023.
The MPC said this was because of “substantial progress” on inflation over the past two years, as external shocks have reduced, and long-term inflation expectations have stabilised.
Zara Nokes, global market analyst at JP Morgan Asset Management, said: “With December’s softer-than-expected inflation print having fuelled market expectations for a cut, the Bank of England likely felt it had no other choice today. The distribution of votes showed high conviction in the call, yet this approach is not without risks.”
The MPC explained that inflation is still “following a bumpy path”. It predicted that headline CPI inflation could rise this year to 3.7%, due to higher energy costs and regulated price changes.
Additionally, uncertainties around supply and demand dynamics remained crucial. It said that longer-lasting weakness in demand relative to supply could warrant a less restrictive Bank rate, while constrained supply could lead to a tighter monetary policy.
The MPC said: “Monetary policy will need to continue to remain restrictive for sufficiently long until the risks to inflation returning sustainably to the 2% target in the medium term have dissipated further.”