The Bank of England (BoE) has reduced its main interest rate by 0.25 percentage points to 4%, marking the lowest level since March 2023 and the fifth rate cut since August 2024. The decision, taken by the Monetary Policy Committee (MPC), comes amid signs of slowing economic growth and rising concerns about unemployment. In a rare twist, the vote was highly divided. The initial ballot ended in a 4–4 tie, forcing a second round of voting, the first in the committee’s 28-year history. It was MPC member Alan Taylor’s change of stance that broke the deadlock, resulting in a narrow 5–4 victory in favour of the cut.
The decision reflects a mounting sense of urgency at the BoE to support an economy under strain. GDP fell by 0.1% in May, and the unemployment rate has climbed to 4.7%, its highest in four years. Inflation, although down from its peak, stood at 3.6% in June and is projected to rise to around 4% in September. Policymakers are navigating a delicate balancing act: easing borrowing costs to encourage spending and investment while being mindful of inflationary pressures, which remain above the 2% target. Governor Andrew Bailey described the approach as “gradual and careful,” stressing that future moves will depend on economic data in the coming months.
Financial markets reacted quickly to the announcement. The pound strengthened, reaching a two-week high against the US dollar, and showed modest gains against the euro. Bond yields also moved up slightly as investors reassessed the likelihood of further cuts. However, optimism for another rate reduction at the September MPC meeting has faded sharply, with market odds falling to just 7%. Some analysts believe there may be one final cut later in the year, potentially in November, depending on inflation trends and consumer spending data.
The immediate effects of the decision will be felt differently across the economy. Borrowers, particularly the 590,000 households with tracker mortgages, will welcome the relief. On an average balance of £140,000, monthly repayments are expected to drop by nearly £29. Mortgage lenders have already begun offering competitive deals, with some two-year fixed rates dipping to 3.8%. However, for savers, the news is less positive. Banks are expected to lower savings rates, reducing returns at a time when many households are still trying to rebuild their financial buffers after the cost-of-living crisis.
For consumers, lower borrowing costs could encourage spending, but there is also a risk that inflationary pressures, particularly from food and energy, may worsen. Food inflation is forecast to climb beyond 5% by the end of the year, partly driven by supply chain disruptions and wage growth. This creates a complicated picture for policymakers, as stimulating demand too aggressively could reignite price rises.
Politically, the BoE’s decision puts additional pressure on the government, particularly Chancellor Rachel Reeves, to outline a clear fiscal strategy that supports growth without exacerbating inflation. The government has recently faced criticism for measures such as national insurance increases and new spending commitments, which some economists warn could keep inflation elevated. This has led to calls for closer coordination between monetary and fiscal policy to ensure the economy recovers sustainably.
The split within the MPC also highlights a broader shift in central banking dynamics. Dissent among policymakers has grown in recent years, reflecting the challenge of managing monetary policy in an era marked by post-pandemic economic adjustments, geopolitical tensions, and climate-related supply shocks. The BoE’s internal debate mirrors similar divisions at the US Federal Reserve and the European Central Bank, as central bankers weigh the risks of doing too little against the dangers of doing too much.
Looking ahead, the BoE will closely watch incoming data on inflation, wage growth, and consumer spending before deciding on its next move. While the latest cut aims to support households and businesses through lower borrowing costs, its success will depend on whether it can revive growth without unleashing another surge in prices. For now, the rate cut represents both an opportunity and a risk, a calculated gamble in uncertain economic times.
