They phased these cuts in over the course of August 2024 to allow the UK to address its own economic challenges aggravated by rising global trade tensions. The interest rate is at a 16-year high of 5.25%. In an effort to counteract increasing fears of inflation, policymakers have extended it each quarter to encourage economic growth.
UK inflation as measured by CPI is at 2.6%. Projections, including from the Bank of England itself, indicate it will double the Bank’s inflation target of 2% in the next few months. The main thing that’s fueling this inflation is the second big header Home energy and water bills jumped by record levels in April. Against these inflationary pressures, the MPC’s decision to lower the cost of borrowing is a bid to stabilize the economy.
The rate cut announcement was delayed by two minutes. In addition to this brief Justice Pause, which took place on May 8, Victory in Europe Day, we held space for a moment of silence. This brief pause exemplifies just how heavy the historical legacy lingers over the present economic debates.
The US-UK trade deal we expect in the coming year will change that economic reality further. It guarantees relief from at least some of the pain that President Donald Trump’s wide-ranging tariffs inflicted on British products. This trade agreement, described by Trump as “full and comprehensive one that will cement the relationship between the United States and the United Kingdom for many years to come,” is viewed as a crucial step toward enhancing economic cooperation.
All is not settled as uncertainties remain on the horizon with a looming US-China trade war potentially threatening to hurt both economic giants. Market analysts warn that any such spike in tensions could put heavy pressure on oil prices and the entire economic growth outlook. Edward Allenby, an economist, commented on the MPC’s response to these pressures:
“With US trade policy presenting a new demand shock, there have been early signs that the MPC is willing to adopt a more proactive approach to loosening policy.”
In the background of all these changes, inflation rates around the world are lower than they have been in years. Central banks across the world have made historic moves to lower the cost of borrowing. They’ve moved on from the near-zero rates imposed in the coronavirus crisis.
As the UK prepares for further economic challenges, the MPC’s actions reflect a commitment to fostering growth while navigating the complexities of international trade dynamics.
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