The Bank of England has signaled the possibility of reducing interest rates in August, marking the potential first cut in borrowing costs in over four years.

During its recent meeting, the Bank voted to maintain interest rates at 5.25%, though the decision was closely contested. Earlier reports indicated that inflation, which measures the rate of price increases, had slowed to 2% in May, aligning with the Bank of England’s target. However, certain areas of inflation remain elevated, posing risks.

Minutes from the rate-setting committee meeting indicated a notable shift in stance, suggesting that a majority may vote for a rate cut when they reconvene on August 1. The committee emphasized monitoring whether concerns are diminishing.

“While not yet finalized, this language strongly indicates to both markets and the public that a rate cut is now the most probable outcome after the Bank completes its updated economic forecasts,” the minutes stated.

The Bank’s decision comes amidst the lead-up to a general election, where economic policies are a significant focus for political parties. However, the Bank clarified that the election timing does not influence its policy decisions.

The Bank of England’s interest rate influences mortgage, credit card, and savings rates for millions across the UK. Despite hints of a potential rate cut in August, many homeowners approaching the end of fixed-rate deals currently face mortgage rates significantly higher than recent norms.

Presently, the average rate for a two-year fixed mortgage deal stands at 5.96%, although this is lower than the peak of 6.86% seen last year.

Mortgage adviser Ben Perks, who works in Wolverhampton, told BBC Radio 5Live that while he was not surprised by the Bank’s decision to hold rates for now, he was “definitely disappointed, certainly frustrated”.

“It’s OK saying, ‘Oh, we’ll wait’ but the reality is that 125,000 people a month are coming to the end of their fixed rates, which over a two-month period is the population of Wolverhampton city centre.”

He says he’s had borrowers in tears in his office when they’ve found out how much their mortgage repayments are going to go up by.

“It is extremely stressful. We’ve had meetings when you tell them the new payments and, with the fact everything else has gone up, they don’t know which way to turn.”

Wednesday’s inflation data showed that price rises for services – which reflect the cost of items such as cinema tickets, restaurant meals and holidays – remained higher than expected.

But the minutes from the Bank’s meeting say that the slow fall in services inflation reflects one-off factors, including the rise in the National Living Wage and bills that automatically rise by inflation, such as broadband and mobile.

The Bank’s rate-setting committee voted 7-2 to hold rates, but the result was not as cut and dried as it had been previously. For three members, voting to hold this month was a “finely balanced” decision.

Those committee members leaning towards a cut, which appear to include the key Bank of England leadership, are playing down the strength of underlying inflationary pressures.

If the Bank does go ahead with an interest rate cut in August, it would be the first one since March 2020 when the UK was heading into the first Covid lockdown. “It’s good news that inflation has returned to our 2% target,” said Bank governor Andrew Bailey.

“We need to be sure that inflation will stay low and that’s why we’ve decided to hold rates at 5.25% for now.” The Bank of England is independent of the government and its main role is to keep inflation stable at 2%.

In response to high inflation, the Bank in recent years has raised and then kept interest rates at a high level. The theory behind rising rates is that it will slow inflation, but it can also drag on economic growth as businesses may put off investment or hiring, which could mean fewer jobs being created.

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Theresa Anyanwu

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