Britain cuts interest rate to 5% after inflation holds at 2% target for two-straight months

Aug. 1 (UPI) -- Britain's central bank cut the country's base interest rate Thursday by a quarter percentage point to 5%, marking the end of a more than two-and-a-half-year battle to control inflation in the aftermath of COVID-19 and energy and food price shocks triggered by Russia's invasion of Ukraine.

The Bank of England's Monetary Policy Committee voted 5-4 for the cut after determining that hikes that took the Bank Rate from 0.1% at the end of 2021 to 5.25% last summer in a bid to slow the pace at which prices were rising were doing the job, the bank said in its Monetary Policy Report .

"Over the past couple of years, we have raised interest rates to slow down inflation. It's working. Inflation in the U.K. fell 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-19 and in part due to higher interest rates" reducing demand for goods and services in the economy.

"Inflationary pressures have now eased enough that we've been able to cut interest rates today," said the bank.

The decision takes the United Kindom out of step with the United States where the Federal Reserve on Wednesday opted to maintain its restrictive monetary policy stance, keeping interest rates on hold at 5.25%-5.50% despite a "substantial easing" in inflation.

U.K. inflation peaked at 11.1% in October 2022 falling to 8% in August 2023 and kept on falling to reach 2.3% in April prompting then-Prime Minister Rishi Sunak to call a general election the same day the Office for National Statistics made the announcement May 22.

The bank, however, stressed Thursday's decision was finely balanced, saying that the risks of higher inflation had not gone away and that the bank needed to make sure to avoid cutting rates too far or too fast given it expected inflation to temporarily spike to 2.75% later in the year -- but to fall again in 2025.

"We will need to make sure inflation stays low in the years to come. Despite overall inflation being at target, prices of some items are still rising quickly. Prices of services such as hotels and restaurants, insurance and rents for housing are still rising at rates well above their past averages," the bank warned.

Stronger than expected demand for goods and services at the start of 2024 were also a concern with the bank cautioning that inflation could be pushed higher were this strong demand to persist.

Gov. Andrew Bailey would not be drawn on possible additional cuts later in the year.

"We will consider whether or not to cut interest rates further at future meetings," he said adding that the greatest difference the Bank of England could make to economic growth and people's prosperity was to ensure "low and stable" inflation.

He also would not be drawn on by the new Labor government's announcement on Monday of $12.1 billion worth of potentially inflationary public sector pay rises for doctors, health workers, teachers, police and the military.

Chancellor Rachel Reeves denied the deal could push up inflation saying she would limit the hit to the public finances through efficiencies she had identified in government spending.

The cut, which will reduce borrowing costs for loans and mortgages but negatively impact the interest savers earn on their deposits, received a mixed response.

Business groups welcomed it as providing breathing space that could boost investment but unions said it did not go far enough to help working people struggling with cost-of-living pressures and housing costs at record levels.