As explained in the just-released August Inflation Report:
At its August meeting, the Committee noted that under the central projection conditioned on market interest rates, annual output growth remained subdued in the near term but grew briskly thereafter, with inflation rising to, and then above, the target two or so years ahead. The Committee also noted that under the central projection conditioned on a constant interest rate of 4.5%, growth was projected to be a little weaker, with inflation close to the target at the two-year horizon. In the light of this outlook, and bearing in mind the balance of risks, the Committee judged that a reduction of 0.25 percentage points in the repo rate to 4.5% was necessary to keep inflation on track to meet the target in the medium term.
I'm a big fan of this way of describing the policy action. To paraphrase: We looked at our forecasts of where the economy was headed under the presumptive policy path going into the meeting, and things looked pretty good. Adding it all up, though, we felt a little less confident about those growth numbers than we did about the inflation outlook, so easing off a bit on the policy rate seemed like a prudent action.
Very nice.
p.s. You can find the webcast of Governor Mervyn King's press conference here.