The Bank of England reduced its key interest rate for the first time in over four years, differing from the Federal Reserve, which has kept borrowing costs high. The U.K. central bank lowered its benchmark rate by a quarter-percentage point to 5% on Thursday.
Inflation in the U.K. has returned to the bank’s 2% target, but services inflation remains high at 5.7% in June. Five policymakers voted for the cut, while four opposed, citing inflation concerns.
Central banks globally are cautious about reducing borrowing costs too quickly. The Fed recently kept its rates steady between 5.25% and 5.5%, with potential cuts hinted for September.
The BOE's move aligns with other central banks lowering rates cautiously. BOE Governor Andrew Bailey emphasized the need for careful rate adjustments to ensure inflation remains low.
The U.K.'s growth outlook has improved, with a forecast of 1.25% growth for the year, up from 0.5%. However, growth is expected to slow to 1% by 2025 due to high rates' impact.
The U.K.'s high debt, exceeding 100% of GDP, limits the government's ability to address economic issues. Chancellor Rachel Reeves recently announced spending cuts and potential tax increases. The Swiss National Bank and European Central Bank have also cut rates, while the Bank of Japan raised its benchmark rate to 0.25%.
