Bank of England considering first rate cut since COVID-19 began more than 4 years ago

LONDON – Borrowing costs in the UK could be cut on Thursday for the first time since the start of the coronavirus pandemic more than four years ago, although economists stressed the decision is likely to be narrow.

Economists are divided over whether the Bank of England, which is independent of the government, will cut its key interest rate by a quarter of a percentage point from its current 16-year high of 5.25% or wait until September to do so.

While inflation has reached the bank’s target of 2%, several members of the nine-member policy panel have expressed concern about continued price pressures in the services sector, which accounts for about 80% of the UK economy.

UK interest rates have been flat for a year after a dramatic series of hikes, but it has been clear for months that the Monetary Policy Committee is heading towards a cut. In the last two meetings, two of its nine members have backed a cut.

James Smith, market economist at ING, said it would be a “narrow victory” but expected enough members overall to support a quarter-percentage point rate cut after recent data.

“The bottom line is that there is just enough in the recent data to give the Bank confidence to cut rates,” he said.

Central banks around the world dramatically increased their borrowing costs from the lows of the coronavirus pandemic. Then suddenly prices started to rise, first due to supply chain problems that arose during the pandemic, and then because of Russia’s large-scale invasion of Ukraine, which drove up energy costs.

Higher interest rates, which cool the economy by making it more expensive to borrow, have helped reduce inflation, but they have also had a negative impact on the UK economy, which has barely grown since the pandemic.

Critics of the Bank of England say it is overly cautious about inflation and that keeping rates too high for too long will put unnecessary strain on the economy. It is an accusation that has also been leveled at the US Federal Reserve, which has also kept rates unchanged in recent months but, like the Bank of England, is considering when to start cutting.

Some central banks, including the European Central Bank, have started cutting interest rates, but are doing so cautiously.