The Bank of England has cut interest rates for the first time since March 2020, handing a boost to mortgage holders and business owners.

However, the FTSE 100 lost ground, ending the session down 1% at 8,283 points, after Governor Andrew Bailey warned that the Bank must be "careful not to cut rates too much or too quickly", amid continuing concern over inflation.

Attention turned quickly to whether today's cut would be the first in a series of reductions to the borrowing rate by the Bank.

Members of the central bank’s Monetary Policy Committee voted by a majority of 5-4 to reduce the bank rate by 0.25 percentage points to 5%. Four members preferred to maintain the rate at 5.25%, where it had been since August last year. Prior to that, the bank rate had been increased on 14 consecutive occasions, from a historic low of 0.1% in December 2021 to 5.25%, in an attempt to combat surging inflation.

The vote to cut the bank rate comes with inflation having been reduced to 2% in May and June, in line with the Bank of England’s target.

However, the bank said it expects inflation to rise to around 2.75% in the second half of this year, as declines in energy prices last year fall out of the annual comparison. The bank said this will reveal “more clearly the prevailing persistence of domestic inflationary pressures”.

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Responding to the cut, Allen Simpson, deputy chief executive of trade body UKHospitality, said: “I hope this will provide some relief for businesses that are continuing to pay back Covid loans, and encourage consumers to spend.

“Now is the time to press the accelerator on growth. We need to see interest rates continue to fall, and for the Government to urgently implement its promised reforms to business rates. Combined, this will see a meaningful and much-needed boost for hospitality businesses.”

Richard Beresford, chief executive of the National Federation of Builders, said:  “The NFB welcomes the Bank of England’s decision to cut the base rate. From housing and commercial premises to renewables and roads, more affordable lending will help more projects get off the ground.

“However, the clear message from today’s announcement was to not expect continued cuts, as the Governor of the BoE is cautious about cutting rates too quickly or by too much. This places greater pressure on the Government to deliver strategic reforms across planning, procurement, and regulation, which are essential to relieving some of the financial burdens that currently stop projects being delivered.”

There is uncertainty over whether today’s vote will be the start of a protracted series of cuts to the base rate.

Suren Thiru, economics director of the Institute of Chartered Accountants in England and Wales (ICAEW), said:  “The decision to cut interest rates will provide much needed cheer to those households grappling with onerous mortgage costs and to businesses trying to access the finance they need to grow. 

“While this rate cut marks a notable shift in direction, the financial reality facing households and firms won’t materially change, as this is just one step back from the previous period of 14 rate hikes.  

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“The split vote decision among rate setters suggests this was a rather hawkish rate cut, so this policy loosening is unlikely to herald the start of a major interest rate-cutting cycle. 

“With the bank forecasting that inflation will drift higher in the coming months, the Monetary Policy Committee is likely to put off lowering interest rates again until the end of the year.” 

Luke Bartholomew, deputy chief economist at Edinburgh investment firm, said: “Today’s monetary policy decision always looked like a finely balanced judgement. And so it proved, with policymakers very divided, and the smallest possible majority voting in favour of a cut. Attention will now turn to how far and how quickly interest rates will fall from here.

“The Bank’s signalling talks of the risk of cutting “too quickly”, but its own forecasts imply that inflation will come in well below target in a couple of years if interest rates follow the path currently priced into markets.

“This might be a signal that the majority of policymakers are expecting to cut more than the market currently forecasts. We tend to agree with that assessment, and expect rates to fall further over the next six months. But ultimately it is the data that will determine how interest rates evolve from here, with the Bank hoping its conviction that underlying inflation pressures are fading will be vindicated.”