The Bank of England’s Monetary Policy Committee (MPC) has voted to cut interest rates by 0.25% to 5%.

CPI Inflation rose to 2.5% in February and 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.

To ensure that inflation meets the 2% target in the medium term, the committee needed to balance the two risks. On the upside, above-target inflation this year could raise inflation expectations so that, in the absence of some margin of spare capacity, inflation would remain above the target. On the downside, the disruption in financial markets could lead to a slowdown in the economy that was sufficiently sharp to pull inflation below the target.

In the committee’s opinion, the balance of these risks to the inflation outlook in the medium term justifies a cut in interest rates this month. Credit conditions have tightened and the availability of credit appears to be worsening. While the recent depreciation in sterling will support net exports, the prospects for output growth abroad have deteriorated. In the United Kingdom, business surveys suggest that growth has begun to moderate and that a margin of spare capacity will emerge during this year. This should help to keep domestic inflationary pressures in check in the medium term.