The Bank of England has cut interest rates to 4% as it warns inflation may be higher than previously predicted.
In a widely-trailed move, the Bank's Monetary Policy Committee voted by a majority of 5–4 to reduce the Bank Rate by 0.25 percentage points from its previous level of 4.25%..
The Bank said: "There has been substantial disinflation over the past two and a half years, following previous external shocks, supported by the restrictive stance of monetary policy. That progress has allowed for reductions in Bank Rate over the past year. The Committee remains focused on squeezing out any existing or emerging persistent inflationary pressures, to return inflation sustainably to its 2% target in the medium term."
The Bank said twelve-month CPI inflation rose to 3.5% in the second quarter "owing to developments in energy, food and administered prices", while pay growth has declined and is expected to slow further.
It added: "The Committee continues to be vigilant about the extent to which easing pay pressures will feed through to consumer price inflation.
"CPI inflation is forecast to increase slightly further to peak at 4.0% in September. Inflation is expected to fall back thereafter towards the 2% target, although the Committee remains alert to the risk that this temporary increase in inflation could put additional upward pressure on the wage and price-setting process. Overall, the MPC judges that the upside risks around medium-term inflationary pressures have moved slightly higher since May."
The Bank said underlying Ƶ GDP growth was "subdued", as the labour market loosened, and it said "trade policy uncertainty has diminished somewhat".
It added: "The timing and pace of future reductions in the restrictiveness of policy will depend on the extent to which underlying disinflationary pressures continue to ease."
The committee had to hold two votes for the first time in its history after the initial decision was split. At first four of the nine-person committee wanted rates to be cut by 0.25 percentage points to 4% while four wanted to keep rates unchanged, and one member preferred a bigger 0.5 percentage point cut. The committee had to hold a second vote in order to secure a majority.
Governor Andrew Bailey said it was a “finely balanced decision”, adding: “Interest rates are still on a downward path, but any future rate cuts will need to be made gradually and carefully.”
Chancellor Rachel Reeves said: “Since the general election, interest rates have been cut five times and are now at their lowest level for two years – bringing down the cost of mortgages and loans across the Ƶ.
“By bringing stability back to the country’s finances, we’re putting more money in people’s pockets.”
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