The Monetary Policy Committee (MPC) at its meeting at the end of July decided by a majority vote of 5-4 to reduce the Bank Rate by 0.25 percentage points, to 5%.

The MPC’s task is setting monetary policy to meet the 2% inflation target, and in a way that helps to sustain growth and employment. To achieve this the MPC adopts a medium-term and forward-looking approach to determine the monetary stance required to achieve the inflation target sustainably.

In a statement, Andrew Bailey, Governor of the Bank of England outlined why it has decided to reduce the Bank Rate by 0.25 percentage points:

“Over the past couple of years we have raised interest rates to slow down price rises (inflation). It’s working. Inflation has fallen over the past 18 months, with inflation in the UK falling back to our 2% target in May and June. In part due to the fading impacts of global shocks like the war in Ukraine and Covid, and also due to higher interest rates.

“Inflationary pressures have now eased enough that we’ve been able to cut interest rates. But this decision was finely balanced. The risks of higher inflation remain, so we need to make sure inflation stays low, and we have to be careful not to cut interest rates too much or too quickly.

“Though we expect inflation to rise again this year, to around 2¾%, we expect this increase to be temporary with inflation coming back down next year.

“Over the coming years, we need to ensure that inflation continues to stay low, because high inflation affects everyone, but it particularly hurts those who can least afford it.”

Our job is to make sure that inflation stays at our target

“Higher interest rates work by reducing demand for goods and services in the economy, and this helps slow the rate of inflation.”

“Despite overall inflation being at target, prices of some items are still rising quickly. Prices of services – for example, hotels and restaurants, insurance, and rents for housing – are still rising at rates well above their past averages. We saw at the start of this year that demand for goods and services in the economy was stronger than we expected. If this stronger demand were to continue, this could lead to higher inflation.

“However, the best contribution the Bank can make to support economic growth and people’s prosperity is by ensuring we have a low and stable inflation. We need to put the period of high inflation firmly behind us, and we also need to be careful not to cut rates too much or too quickly.”

Whether interest rates will be cut or not, will be decided at the next MPC quarterly meeting.