Interest rate cut is a huge risk – let's hope it pays off

That sound you're hearing if you’re in the vicinity of the City of London, Canary Wharf, and especially Westminster, is a collective sigh of relief, one echoed by borrowers nationwide.

- JAMES MOORE CHIEF BUSINESS COMMENTATOR

The Bank of England’s decision to cut interest rates by a quarter point to 4 per cent was widely expected. The smoke signals emanating from Threadneedle Street had suggested it was a done deal.

But as it turned out, the vote was on a knife edge: for the first time in its history, the nine-person rate-setting Monetary Policy Committee (MPC) was forced to take a second vote, with just five members backing a 0.25 per cent cut; four called for no change. The first vote went 4-4-1, with external member Alan Taylor – the first Rachel Reeves appointee - calling for a half-point cut.

Now, I support the decision to cut to 4 per cent. The economy is struggling. Unemployment is rising. Wage settlements are falling, a point those voting in favour of an interest rate cut took note of. But make no mistake, the decision still represents a big gamble on the part of the MPC.

Inflation is running hotter than expected. It came in at 3.6 per cent in June, and will likely show another rise when the July figure is in. The Bank has raised its expectations for the peak to 4 per cent in September. The MPC is fond of reminding us that its 2 per cent target applies “at all times”. Yet here it is, cutting when inflation is expected to double. This cut could have the effect of pouring petrol onto an inflationary fire.