The Bank of England (BoE) voted by a narrow margin to cut interest rates from 4.25 percent to 4 percent on Thursday as the central bank resumed what it describes as a “gradual and careful” approach to monetary easing. The BoE was widely anticipated to trim rates by 25 basis points at its latest monetary policy meeting, but traders and economists were eager to see the breakdown of support for the decision among the bank’s policymakers.
As it turned out on Thursday, the nine-member Monetary Policy Committee (MPC) voted by a majority of 5–4 to reduce the key interest rate, known as the “Bank Rate,” by 25 basis points rather than keeping it unchanged. Following the decision, the British pound appreciated by 0.5 percent against the dollar, reaching $1.3424.
Policymakers have had to consider persistent inflation—the consumer price index (CPI) rose to a hotter-than-expected 3.6 percent in June from 3.4 percent in May—alongside a cooling jobs market and sluggish growth. The U.K.’s gross domestic product contracted by 0.1 percent month-on-month in May.
Cautious approach reiterated
In a statement on Thursday, the bank indicated that the MPC “remains focused on squeezing out any existing or emerging persistent inflationary pressures, to return inflation sustainably to its 2 percent target in the medium term.” The MPC was initially divided on whether to reduce or maintain interest rates, with four members favoring a hold, four others voting for a cut, and one policymaker advocating for a larger 50-basis-point reduction. The committee subsequently held a second round of voting to reach a majority decision to cut rates by 25 basis points.
Despite the differing viewpoints among policymakers at the BoE, economists predict the downward trend for interest rates will persist into next year. However, the central bank reiterated its cautious stance, noting that “a gradual and careful approach to the further withdrawal of monetary policy restraint remains appropriate.”
The timing and pace of future reductions in the restrictiveness of policy will hinge on the extent to which underlying disinflationary pressures continue to ease, the BoE stated. Governor Andrew Bailey remarked in a press conference on Thursday that it “remains important that we do not cut bank rate too quickly or by too much.” He added that “there are good reasons to think that this rise in headline inflation will not persist.”
Shifts in BoE’s tone
U.K. Chancellor Rachel Reeves described the central bank’s fifth interest rate cut since the last general election in July 2024 as “welcome news, helping bring down the cost of mortgages and loans for families and businesses.”
Market economists such as Jack Meaning, chief U.K. economist at Barclays, expect more gradual, quarterly cuts of 25 basis points, with the Bank Rate potentially declining to around 3.5 percent by February next year. Ashley Webb, a U.K. economist at Capital Economics, anticipates more aggressive easing, projecting rates to fall to 3.0 percent by 2026, driven by weakening labor market conditions despite recent inflation upticks.
The Monetary Policy Committee’s split—with a historic need for two rounds of voting to resolve a deadlock—underscores ongoing uncertainty regarding the balance between inflation risks and economic growth. The BoE has also shifted its tone slightly by removing previous language suggesting that monetary policy remains restrictive, indicating a possible nearing end to rate cuts. Nevertheless, the committee emphasized that there is no predetermined path for borrowing costs, asserting flexibility contingent on evolving economic data.
This decision and outlook should be viewed in the context of broader economic signals reported by the U.K. Office for National Statistics and commentary from financial institutions. The ONS data highlighted a mild GDP contraction and rising inflation pressures, while labor market reports indicate gradual softness, translating into wage growth moderating to 5.6 percent annually, according to reports on U.K. wages.
