The Bank of England has narrowly backed an interest rate cut in a knife-edge move after it had to vote twice to reach a decision.
The cost of borrowing has been reduced from 4.25% to 4% in the fifth cut since last August.
But the Bank’s unprecedented second vote suggests further interest rate cuts will be finely balanced amid concerns that inflation will spike as businesses raise food prices to pay for increased employment costs.
“Material increases” in National Insurance Contributions and the national living wage have added up to 2% to food prices, businesses told the Bank.
Inflation is now expected to peak at 4% in September, the Bank said in its Monetary Policy Report. That is twice the Bank’s target rate and above the 3.8% spike it predicted in its May report.
Andrew Bailey, governor of the Bank of England, said the decision to cut interest rates was “finely balanced”.
“Interest rates are still on a downward path,” he said. “But any future rate cuts will need to be made gradually and carefully.”
While food prices have been affected by the government’s decision to increase the minimum wage and National Insurance payments, the Bank said global adverse weather conditions had lifted the cost of goods such as beef, coffee beans and cocoa.
But companies told the Bank that they expected labour costs “to continue to push up food prices in the second half of the year”.
Businesses said that in order to mitigate costs, they were having to cut staff.
They also reported that shoppers were “trading down” by purchasing own-label items as opposed to branded products.
Customers are increasingly buying “cheaper cuts of meat” and purchasing food staples in larger value packs.
At 4%, interest rates are now at their lowest level since March 2023. This will boost some mortgage-holders and borrowers, but it is likely to mean smaller returns for savers.
People with tracker mortgages, which are loans that rack the Bank’s base rate, should see an immediate reduction on monthly repayments. There about 600,000 people who have one.
The latest cut in rates means repayments on an average standard variable rate mortgage of £250,000 over 25 years will fall by £40 per month, according to financial information company Moneyfacts.
The Bank’s rate-setters were split between four members who wanted to cut, four who wanted to hold and one who wanted a steeper reduction in borrowing costs.
Looking ahead, the Bank lifted its forecast for economic growth in the short-term and said the impact of US tariffs on the UK was not expected to be as much as it thought back in May.
However, tariffs are expected to dent economic growth to the tune of 0.2%.