BoE Cuts Rate to 4% After Tight Vote

The central bank revised its 2025 GDP growth forecast up slightly to 1.25%.

The Bank of England has cut its benchmark interest rate by 25 basis points to 4%, marking its first rate reduction since spring 2023. The move came after an unusually tight vote by the Monetary Policy Committee (MPC), with five members in favor and four opting to hold. It took two rounds of voting to secure a majority, a first in the BoE’s history, highlighting the intense debate among policymakers as they weigh the risks of inflation against sluggish economic momentum.

Bailey: “Gradual and Careful” Approach Ahead

Governor Andrew Bailey described the decision as “gradual and careful,” signaling a measured and cautious path forward. Despite the cut, the BoE remains wary. Inflation is projected to peak at 4% in September, driven in part by fiscal changes introduced by the new Labour government, including higher payroll taxes and a minimum wage hike, which have started to pressure the UK labour market. Since these changes took effect, the economy has shed around 185,000 jobs.

Still, the central bank revised its 2025 GDP growth forecast up slightly to 1.25%, offering a sliver of optimism despite ongoing headwinds. The balance remains fragile, as policymakers continue to assess how structural fiscal shifts and wage pressures will impact broader economic recovery.

Bond Market Stress Spurs Policy Rethink

Beyond interest rates, the BoE flagged potential changes to its quantitative tightening (QT) strategy. Mounting stress in long-dated gilt markets has raised red flags, prompting a review of the central bank’s bond sale plans at the upcoming meeting. Market participants will be closely watching how the BoE navigates tightening without triggering volatility in UK debt markets.

What’s Next? Markets Expect More Easing

Financial markets are already pricing in one more rate cut before the year ends, with the policy rate seen stabilizing around 3.5% by 2026. However, the pace and direction of future moves will depend heavily on how inflation evolves and how the labour market holds up in the face of ongoing fiscal reforms and global uncertainty.

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