Bank of England Cuts Rates to 4.25% with Slowing Inflation

The Bank of England (BoE) delivered the expected 25 basis point cut at its May meeting, lowering the Bank Rate to 4.25%.

The decision, passed by a narrow 5–4 majority within the Monetary Policy Committee (MPC), reflects growing confidence in the UK’s disinflationary trajectory and the impact of tight monetary policy in helping stabilize inflation expectations.

A Divided Committee Signals Policy Caution

The vote revealed differing views among MPC members:

Two members supported a larger 50 basis point cut, aiming to bring the rate to 4.00%,
Two others voted to leave the rate unchanged at 4.50%.

The Bank of England attempts to support slowing economic growth while ensuring inflation continues on its downward path.

Inflation Slows, but Temporary Rebound Expected

Recent data has signaled easing inflation pressures in the UK:

CPI inflation declined to 2.6% in March, moving closer to the BoE’s 2% target
UK GDP growth has slowed notably since mid-2024
The labour market is showing signs of softening

However, the MPC warned that inflation may temporarily rise to around 3.5% in Q3, largely due to base effects from earlier energy price changes. Despite this, the Committee expects inflation to resume its downward trend later in the year. While wage growth remains high, it is forecast to moderate in the months ahead as labour demand eases.

Global Uncertainty Adds to Cautious Approach

The BoE’s decision also comes with a background of rising global conflicts:

New US tariffs and slowing global growth have contributed to a reduction in global interest rate expectations,
These external risks are now a more prominent factor in shaping the BoE’s policy stance.

The MPC reaffirmed its commitment to returning inflation to the 2% target sustainably, emphasizing that future decisions will be data-dependent. The Committee will continue monitoring domestic conditions, inflation dynamics, and evolving global risks before adjusting policy further.

Forward Guidance: Gradual and Measured

The BoE signaled that any additional rate cuts would follow a cautious and measured path, prioritizing a balance between supporting economic recovery and preserving credibility in inflation control. The May rate cut marks the first step in what could become a gradual easing cycle, contingent on the persistence of disinflation and broader economic developments.

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