The Bank of England’s Monetary Policy Committee (MPC) today (10 April) voted to cut the base rate from 5.25 per cent to five per cent, the third time since early December that it has been reduced.

The decision comes after figures revealed that inflation remains above the government's target of two per cent, with energy and food prices rising.

The most recent data showed that inflation, as measured by the Consumer Prices Index, was 2.5 per cent in February, up from 2.2 per cent in January.

In a statement, the MPC said: ‘The Committee expects inflation to rise further this year, reflecting the continuing impact of higher energy and food prices, as well as the recent depreciation of sterling on import costs. Such pressures are already evident in producer input costs and pricing intentions.’

Edward Menashy, chief economist at Charles Stanley, comments, ‘Central Banks are well aware of the benefits of low inflation. It was the low-inflation climate of the mid 1980s and 1990s that enabled interest rates to fall, allowing bonds and equities to rise. In turn, low interest rates reduced the cost of capital and encouraged investment, employment and wealth creation. There is no central banker worth his salt who would not want to achieve low inflation.
 
‘Inflation flowing through this pipeline in the UK could cause the Consumer Prices Index (CPI) to breach the limit of 3.1 per cent. That would require a letter of explanation to be written by the governor of the Bank of England to the chancellor of the exchequer explaining why the target was breached.’

While a cut in the cost of borrowing will be welcomed, it is not expected to make a significant difference to the UK mortgage market, where providers are continuing to raise rates on home loans, primarily driven by the high rate of Libor – the London inter-bank offer rate – which is the rate banks charge to lend to each other.

In an attempt to relieve some of the pressure in the financial markets, the Bank of England announced an additional £5 billion in its monthly auction of money that banks are able to borrow for three months, offering £15 billion on April 16.

The move helped reduce Libor from 5.95 per cent to 5.93 per cent, after it rose above six per cent on 31 March as banks grew increasingly cautious about lending money to other financial institutions.