The Bank of England MPC has cut the base interest rate to 4%.

Bank of England Cuts Rates Again — Down to 4%

🏦 Fifth consecutive cut → Base rate now at 4.0%🎯 Goal? Support weak growth & jobs market📊 Inflation: 3.4% (still above target)📈 Peak inflation (late 2022): 11%

ECONOMICS CONCEPT:

➡️ Expansionary monetary policy

➡️ Cutting interest rates to stimulate aggregate demand (AD)

➡️ Still above 2% inflation target → policy dilemma

Lower Rates = Cheaper Borrowing

🏠 Tracker/variable mortgages fall

💳 Loans & credit cards cheaper

📉 Example: £150,000 mortgage payment drops by £21/month after 0.25% rate cut

ECONOMICS CONCEPT:

➡️ Lower interest rates reduce cost of borrowing

➡️ Boosts consumption (C) and investment (I)

➡️ Part of monetary policy transmission mechanism

💷 But Savers & Retirees Lose Out…"

🏦 Lower rates = lower returns on savings

📉 Annuity incomes may fall

💰 Savers see reduced real income

ECONOMICS CONCEPT:

➡️ Redistribution effects of interest rate changes

➡️ Fall in interest income for savers = lower real incomes

➡️ Trade-off: Stimulating AD vs penalising savers

📉 Slower Growth = Lower Rates, But Inflation Still Sticky

📊 UK inflation = 3.4%, Eurozone = 2.0%

📉 ECB rate: 2.0% | BoE rate: 4.0%

📉 Growth and business investment weak

🏗️ Firms cut pay growth + rethink hiring

ECONOMICS CONCEPT:

➡️ Monetary policy lag – takes 12–18 months to fully impact economy

➡️ Risk of stagflation: low growth + high prices

➡️ Output gap remains negative

⚖️ What Next? More Cuts or Pause?

🔮 BoE forecasts: further cuts in 2025

📉 Rates may drop to 3.75% next

📉 Thousands with fixed mortgages face big repayment jumps in 2025

ECONOMICS CONCEPT:

➡️ Balancing price stability vs economic growth

➡️ Risk of policy reversal if inflation rebounds

➡️ Impact of global factors: energy prices, US Fed policy, trade disruptions

Graham Watson's insight:

Faisal Islam's take on yesterday's interest rate cut noting the difficult balancing act that the Bank of England faces - an obligation to try to hit the inflation target, whilst supporting the broader macroeconomic objectives of the government.

Thus, even though inflation is above target and expected to rise, rates have been cut because of the time lag associated with them taking effect, at which point it is thought that the weakening of the labour market hints at an economy that's slowing and in need of a little bit of monetary stimulus.