The Bank of England has lowered its key interest rate from 4.25% to 4% after a narrow 5–4 vote by the Monetary Policy Committee (MPC), marking the latest step in what the central bank calls a “gradual and careful” approach to monetary easing.
Divided committee and cautious outlook
The MPC’s nine members were initially split, with four favoring a rate hold, four backing a cut, and one advocating a steeper 50-basis-point reduction.
A second round of voting led to the slim majority decision for a 25 basis point cut. The British pound rose 0.5% against the dollar following the announcement.
Balancing inflation and weak growth
Policymakers are contending with persistent inflation—the consumer price index rose to 3.6% in June—alongside a sluggish jobs market and weak economic growth.
The Bank stated its focus remains on returning inflation to the 2% target, noting:
“A gradual and careful approach to the further withdrawal of monetary policy restraint remains appropriate.”
The U.K.’s GDP contracted 0.1% in May, while employment figures signal slack is building in the labor market.
Labor market signals and economic uncertainty
Despite a fall in payrolled employee numbers and rising unemployment, analysts say there’s no ‘smoking gun’ indicating a sharp downturn. ING economists James Smith and Chris Turner wrote:
“Payrolled employee numbers have fallen in seven out of the past eight months. The unemployment rate has risen by a few tenths of a percentage point this year … [and] vacancy data from Indeed suggests the U.K. jobs market has cooled further than in other major economies.”
However, much of the employment weakness is concentrated in hospitality, affected by recent tax changes. The inflation data remains sticky, complicating the path for further easing.
Outlook for future rate cuts
Looking ahead, some economists anticipate additional rate cuts, but caution that further reductions will depend on clear evidence of disinflation.
Capital Economics’ Ashley Webb forecasts rates could reach 3% in 2026 if wage and inflation pressures ease as expected.
