LONDON—The Bank of England cut its key interest rate for the first time in over four years, leaving the Federal Reserve among a dwindling number of central banks that have yet to cut borrowing costs in the face of cooling inflation.
The U.K. central bank lowered its benchmark lending rate by a quarter-percentage point to 5% Thursday. It had kept rates at their highest levels since 2008 for the past year, crimping lending and heaping pressure on the U.K.’s heavily indebted government. Investors went into the meeting split over whether the central bank would cut now or wait for further signals of ebbing inflation.
Ultimately, five of the bank’s policymakers voted for the quarter-point cut, while four voted to keep rates steady, unconvinced that inflation in the U.K. was sufficiently tamped down.
Central banks around the world have wrestled with how quickly to bring down borrowing costs, wary of stimulating economic activity before inflation is fully contained. Job markets have begun to cool but unemployment rates in the U.K. and throughout the developed world remain close to record lows.
The Fed on Wednesday opted to keep interest rates steady in a range between 5.25% and 5.5%, a two-decade high. But Fed Chair Jerome Powell said officials could cut them in September.
While the Fed has stood pat, the BOE’s move aligns it with most other developed-market central banks, which have begun cautiously lowering rates but aren’t expected to return soon to the rock-bottom levels seen before the inflation crisis.
“Inflationary pressures have eased enough that we’ve been able to cut interest rates today. But we need to make sure inflation stays low, and be careful not to cut interest rates too quickly or by too much,” said Bailey.
The bank expects inflation in the U.K. to pick up slightly in the coming months to around 2.75%, reflecting the effects of comparing current prices to last year when energy costs dropped sharply. Underlying pressures on inflation, particularly in the services sector, are expected to ease only gradually. The U.K.’s inflation rate should drop to 1.7% by 2026 if the bank cuts rates as fast as investors are anticipating. Officials said rates need to “remain restrictive for sufficiently long” until its confident inflation will come back to target.
Write to Chelsey Dulaney at chelsey.dulaney@wsj.com and Will Horner at william.horner@wsj.com
