Bank of England cuts interest rates quarterly to 4%

The Bank of England voted on Thursday at a fine margin to cut interest rates from 4.25% to 4% as the central bank resumed what it described as a “gradual and prudent” approach to monetary easing.

While the BOE was widely expected to cut the rate at 25 basis points at its latest monetary policy conference, traders and economists were keen to see the collapse of support for the decision among bank policymakers.

As it turns out on Thursday, the nine MPCs voted with a majority of five to four to cut 25 basis points rather than holding back the main interest rate, the “bank fee.” The UK pound rose 0.5% against the decided dollar to $1.3424.

Policymakers had to put pressure on sticky inflation. The Consumer Price Index (CPI) rose from 3.4% in May to 3.6% at higher temperatures than expected in June. The UK’s GDP contracted 0.1% per month in May.

In a statement Thursday, the bank said the MPC is “focusing on squeezing existing or emergent permanent inflation pressures, and sustainably returning inflation to its 2% target over the medium term.”

The MPC initially split into interest rate cuts or holdings as four members wanted to hold interest rates, with four votes for the cut and one policymaker voted for the 50 base point cut. The committee then held the second round of votes to reach a majority decision to cut 25 basis points.

According to BOE Governor Andrew Bailey, the vote reflects the “fine and balanced situation” that the MPC is currently facing in terms of factors driving monetary policy.

“Inflation has the opposite risk, especially… this current increase could last a bit more than we expect. We don’t really expect it, but can we do that?” Bailey told CNBC’s Ritka Gupta in an interview. “But…it has to be set in the context of labor market conditions that seem to be softening.”

Despite the disagreement of BOE policymakers, economists hope that the downward trajectory of interest rates will continue until next year, but the central bank has repeated its cautious approach.

The timing and pace of future reductions in policy restrictiveness will depend on the extent to which underlying disinflationary pressures continue to ease, BOE said.

“It’s important not to cut bank charges too quickly or too much,” Bailey said at a press conference Thursday, but added that “there is a good reason to think that the rise in inflation in this headline won’t continue.”

British Prime Minister Rachel Reeves said the central bank’s fifth interest rate cut since the last general election in July 2024 was “welcome news and will help reduce mortgage and loan costs for families and businesses.”

George Brown, senior economist at Schroders, said the latest rate cuts were not surprising, but “no progress is clear.”

“Employment, growth and inflation figures are all sought for a variety of policy prescriptions, as reflected in the unprecedented two-round vote needed to reach the majority,” he commented in an email Thursday.

“Given the uncertainty presented by conflicting data, the committee is right to stick to its “gradual and prudent” mantra,” he said.

However, some economists believe that central banks can go further.

“We believe that despite the unexpected rise in CPI inflation in June, we believe that the weakness in the labour market means it’s only a matter of time before wage growth and inflation slows down at a rate consistent with the 2% inflation target,” said Ashley Webb, UK economist at Capital Economics, ahead of the decision.

“The Bank of England expects to cut interest rates from 4.25% to 3.00% in 2026, and will acquire interest rates that are below 3.50% to the financial market,” he said in a memo Wednesday.

The economists pointed out that the labour market is a key factor in policymakers’ decisions, but said there is no conclusive evidence of a robust economic downturn in “smoking guns” and employment numbers.

“The question looms at this meeting is whether there is an imminent, more worrying degradation in the job market,” James Smith and Chris Turner said in a memo from ING, adding, “Slack is definitely a building.”

“The number of payrolled employees has declined in seven of the last eight months. The unemployment rate has risen by a few percentage points this year… (and) suggests that the UK job market has cooled even more than other major economies,” they noted.

However, analysts have a flag on this, which is a “slow moving story,” with most of the weaknesses in employment numbers concentrated in the hospitality sector, disproportionately affected by recent government taxes and national minimum wage and pay taxes.

“In other words, there are no smoking guns that could urge a fundamental rethink of the bank’s outlook, while inflation data still proves sticky,” ING analysts said.