Public sector pay rises unlikely to drive up inflation, says Bank of England after interest rate cut – as it happened

The Bank of England has cut interest rates for the first time since the start of the Covid pandemic.

The Bank’s monetary policy committee (MPC) voted by a narrow majority to cut its base rate by a quarter of a percentage point to 5%, down from a 16-year high of 5.25%.

The MPC was split by five votes to four, with the governor, Andrew Bailey, casting the deciding vote for the first reduction in borrowing costs since March 2020.

With headline inflation holding at the Bank’s 2% target for a second consecutive month in June, financial markets had expected a cut in rates, although City economists had predicted it would be a close call amid fears over stubbornly high inflation becoming entrenched. The pound fell against the US dollar and euro.

The Bank also lifted its forecast for UK growth this year, saying the economy had been stronger than expected in 2024.

Bailey said inflationary pressures had “eased enough” to enable the first reduction in borrowing costs since the Bank stopped ramping up interest rates this time last year – the joint longest period that rates have been held after a hiking cycle since the turn of the millennium.

But he also insisted the Bank must be careful not to cut interest rates “too quickly or by too much.”

Bailey also said that the government’s new public sector pay deal will have almost no impact on inflation.

Former prime minister Rishi Sunak, and ex-chancellor Jeremy Hunt, had both claimed that these pay deal would threaten future rate cuts.

City economists predict the Bank will cut rates by another quarter of one percent by the end of this year, with November seen as a likely date for the next cut.