The Bank of England cut interest rates to 4% by a narrow 5-4 majority, but divergence between inflation and employment underscored a cautious outlook.
2025-08-07 23:19:19
On August 7, 2025, the Bank of England (BoE) cut its base interest rate by 25 basis points from 4.25% to 4%, the fifth rate cut since August 2024 and in line with market expectations. This decision continued the BoE's "gradual and cautious" monetary easing strategy and brought borrowing costs to their lowest level since March 2023.
The Monetary Policy Committee vote was sharply divided
The Bank of England's Monetary Policy Committee (MPC) voted to cut interest rates by a narrow 5-4 majority, highlighting significant divisions among policymakers. This was the first time since the MPC's establishment in 1997 that a decision had to be reached through two votes. The first vote was 4-4-1, with external committee member Alan Taylor favoring a 50 basis point cut, while four members, including Deputy Managing Director Clare Lombardelli and Chief Economist Huw Pill, supported maintaining the rate at 4.25%. Ultimately, Taylor joined the majority in favoring a 25 basis point cut.
Inflation concerns and forecast adjustments
The Bank of England raised its inflation forecasts, predicting it will reach 4% by September 2025, double its 2% target and up from its previous forecast of 3.8%. This upward revision is primarily driven by rising global food prices (for weather-sensitive commodities such as beef, coffee, and cocoa), increased labor costs, and new packaging regulations. The central bank now expects inflation to return to 2% only in the second quarter of 2027, three months later than previously forecast. Nevertheless, Governor Andrew Bailey stated that the rise in inflation is likely to be temporary, driven primarily by short-term factors such as food prices and regulated costs such as water bills.
Slowing economic growth and a weak job market
The Bank of England cited a weak labor market and slowing economic growth as key factors supporting the rate cut. UK GDP growth is expected to slow to 0.3% in the July-September 2025 quarter, down from 0.7% in the first quarter. The unemployment rate rose to 4.7% in the three months ending in May, the highest since June 2021, while job vacancies fell to pre-pandemic levels. Chancellor of the Exchequer Reeves's employer tax hikes and the trade war initiated by US President Trump have further exacerbated the slowdown in economic activity. The Bank of England estimates that US tariffs will reduce UK economic growth by 0.2%.
Market reaction and future expectations
Following the rate decision, the British pound rose 0.5% to $1.3424 against the US dollar, reflecting market reaction to the MPC's cautious stance and the split vote. Short-term UK government bond yields rose, while the FTSE 100 index fell slightly but remained generally stable. According to data from the London Stock Exchange Group (LSEG), investors have lowered their expectations for another rate cut before the end of 2025 and are now fully pricing in a cut to 3.75% in February 2026.
Yael Selfin, chief economist at KPMG in the UK, said the Bank of England may cut interest rates for the last time in November as inflation risks persist.
Ruth Gregory of Capital Economics believes that the Bank of England may have overestimated inflationary pressures and expects it to cut interest rates at every other meeting in the future, eventually lowering them to 3%.
Policy Outlook and Prudent Guidance
The Bank of England reiterated its commitment to further reducing borrowing costs in a "gradual and cautious" manner, noting that the rate cut had made monetary policy less restrictive. Bailey emphasized that while interest rates are on a downward trajectory, uncertainty about their future path has increased. The MPC meeting minutes indicated a slight increase in upside risks to medium-term inflation since May, prompting the central bank to maintain caution.
Convera strategist George Vesi said that the pound's upward momentum due to the rate cut decision may be difficult to sustain. Historically, the pound has fallen an average of 0.6% after rate cut cycles.
The Bank of England's decision was in line with expectations of a quarterly rate cut, but a split vote and an upward revision to inflation forecasts have raised questions among analysts about the sustainability of further rate cuts. Bloomberg analysis indicates that despite recent rate cuts, high borrowing costs are still putting £11 billion of pressure on households annually.
According to CNBC, the interest rate cut will provide some relief to borrowers and businesses, with monthly payments for about 591,000 households with tracking interest rates expected to be reduced by about £29. However, 85% of households with fixed-rate mortgages will not benefit in the short term.
The Bank of England faces the challenge of balancing weak economic growth, high inflation and global trade uncertainty. The divergence in the MPC reflects uncertainty about inflation and labor market dynamics.
The Monetary Policy Committee vote was sharply divided
The Bank of England's Monetary Policy Committee (MPC) voted to cut interest rates by a narrow 5-4 majority, highlighting significant divisions among policymakers. This was the first time since the MPC's establishment in 1997 that a decision had to be reached through two votes. The first vote was 4-4-1, with external committee member Alan Taylor favoring a 50 basis point cut, while four members, including Deputy Managing Director Clare Lombardelli and Chief Economist Huw Pill, supported maintaining the rate at 4.25%. Ultimately, Taylor joined the majority in favoring a 25 basis point cut.
Inflation concerns and forecast adjustments
The Bank of England raised its inflation forecasts, predicting it will reach 4% by September 2025, double its 2% target and up from its previous forecast of 3.8%. This upward revision is primarily driven by rising global food prices (for weather-sensitive commodities such as beef, coffee, and cocoa), increased labor costs, and new packaging regulations. The central bank now expects inflation to return to 2% only in the second quarter of 2027, three months later than previously forecast. Nevertheless, Governor Andrew Bailey stated that the rise in inflation is likely to be temporary, driven primarily by short-term factors such as food prices and regulated costs such as water bills.
Slowing economic growth and a weak job market
The Bank of England cited a weak labor market and slowing economic growth as key factors supporting the rate cut. UK GDP growth is expected to slow to 0.3% in the July-September 2025 quarter, down from 0.7% in the first quarter. The unemployment rate rose to 4.7% in the three months ending in May, the highest since June 2021, while job vacancies fell to pre-pandemic levels. Chancellor of the Exchequer Reeves's employer tax hikes and the trade war initiated by US President Trump have further exacerbated the slowdown in economic activity. The Bank of England estimates that US tariffs will reduce UK economic growth by 0.2%.
Market reaction and future expectations
Following the rate decision, the British pound rose 0.5% to $1.3424 against the US dollar, reflecting market reaction to the MPC's cautious stance and the split vote. Short-term UK government bond yields rose, while the FTSE 100 index fell slightly but remained generally stable. According to data from the London Stock Exchange Group (LSEG), investors have lowered their expectations for another rate cut before the end of 2025 and are now fully pricing in a cut to 3.75% in February 2026.
Yael Selfin, chief economist at KPMG in the UK, said the Bank of England may cut interest rates for the last time in November as inflation risks persist.
Ruth Gregory of Capital Economics believes that the Bank of England may have overestimated inflationary pressures and expects it to cut interest rates at every other meeting in the future, eventually lowering them to 3%.
Policy Outlook and Prudent Guidance
The Bank of England reiterated its commitment to further reducing borrowing costs in a "gradual and cautious" manner, noting that the rate cut had made monetary policy less restrictive. Bailey emphasized that while interest rates are on a downward trajectory, uncertainty about their future path has increased. The MPC meeting minutes indicated a slight increase in upside risks to medium-term inflation since May, prompting the central bank to maintain caution.
Convera strategist George Vesi said that the pound's upward momentum due to the rate cut decision may be difficult to sustain. Historically, the pound has fallen an average of 0.6% after rate cut cycles.
The Bank of England's decision was in line with expectations of a quarterly rate cut, but a split vote and an upward revision to inflation forecasts have raised questions among analysts about the sustainability of further rate cuts. Bloomberg analysis indicates that despite recent rate cuts, high borrowing costs are still putting £11 billion of pressure on households annually.
According to CNBC, the interest rate cut will provide some relief to borrowers and businesses, with monthly payments for about 591,000 households with tracking interest rates expected to be reduced by about £29. However, 85% of households with fixed-rate mortgages will not benefit in the short term.
The Bank of England faces the challenge of balancing weak economic growth, high inflation and global trade uncertainty. The divergence in the MPC reflects uncertainty about inflation and labor market dynamics.
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