Andrew Bailey, governor of the Bank of England voted for the quarter point cut
The Bank of England’s rate setters voted narrowly to cut interest rates to 4% from 4.25% to focus on dragging the UK economy out of a period of stagnation. It is the fifth cut the Bank has announced since last August.
However, the 5-4 split on the monetary policy committee left markets believing it has reduced the likelihood of more cuts this year.
One of the five – Alan Taylor – wanted a half-percentage point cut. Mr Taylor initially voted for a cut to 3.75% but in order to secure a majority decision, a second round of voting was held and the committee was asked to vote on either a 25bps cut or for the rate to remain at 4.25%. He then voted for the quarter-point cut.
Another member, Clarie Lombardelli, who previously called for a cut, switched to wanting rates to be held.
Governor Andrew Bailey said the decision was “finely balanced”, reaffirming that any additional cuts will be “gradual and careful”. The Bank also noted that inflation is expected to reach 4% by September, raising concerns over persistent price pressures.
The FTSE 100 closed 63.54 points (0.69%) lower at 9,100.77, as sterling rose 0.5% against the dollar at 1.3418.
Kathleen Brooks, research director at XTB, said: “The tight vote split, with 5 members voting for a cut, while 4 members voted to remain on hold, is the most noteworthy part of today’s decision.
“The Governor said that the decision was finely balanced and the hawkish camp at the BOE seems to have gained a new member. Claire Lombardelli, who in the past was in the dovish camp, voted to keep rates on hold.
“This suggests that far from opening the door to more rate cuts as the economy stalls and the labour market weakens; the power balance has shifted to the hawks. The immediate aftermath of this meeting has seen a repricing of interest rate expectations for the UK.”
Those supporting a cut did so in spire of inflation rising to 3.6%, well above the Bank’s 2% target. The focus was on the economy which shrank for the second consecutive month in May, while unemployment climbed to a four-year high.
Warnings of a £50 billion black hole follow a failure to stimulate growth and could mean either cuts in spending or more tax rises – as much as 5p on income tax.
While the interest rate cut will ease business costs, there was criticism that the Bank is being too cautious.
George Holmes, managing director of business finance specialist Aurora Capital, said: “The Bank’s direction of travel is right and a cut will be welcomed, but in reality, the pace is painfully slow. Another quarter-point cut won’t make any meaningful difference for small businesses already under pressure from weak demand, rising wage bills and cautious lenders.”
Luke Bartholomew, deputy chief economist, at Aberdeen Group, said; “An interest rate cut today was almost universally expected, except it seems at the Bank of England itself where the voting patterns reveals a very close decision, which required a second round of voting before a majority could be found.
“The tight decision reflects the conflicting forces facing policymakers, with inflation proving stronger than expected but activity growth remaining weak. It will be difficult for the Bank to give clear guidance about the likely path of rates from here given the messy data and divided MPC.
“But in the end, we expect the weakness of growth to win out, and for the Bank to cut rates again later this year, and then through next year as well.”
Darren Polson, head of mortgage operations at Aberdein Considine, said cheaper borrowing costs would add further momentum to a mortgage market that’s been gradually picking up pace.
“We’re already seeing signs of renewed confidence in the market, and today’s announcement could be the catalyst for even more activity as we head into the autumn,” he said.
Jeremy Batstone-Carr, European Strategist Raymond James Investment Services, said: “Without doubt, the MPC debate would have been intense. It is undeniable that the economy is subdued, and May’s weak GDP outturn will likely force the Bank into a lower GDP estimate for the second quarter of 2025 ahead of the data’s official release on 14 August.”
Scottish Friendly savings expert Kevin Brown said: “The cut suggests policymakers believe that a slowing labour market and lacklustre economic growth will combine to bring inflation under control over the next few months.
“The interest rate cut had been widely anticipated and is therefore likely to be reflected in government bond markets already. Mortgage rates had already been coming down and are unlikely to move significantly lower as a result.
“However, the cut may have an impact on savings rates and should be a catalyst for savers to shop around for the best rates to ensure their cash holdings are outpacing inflation.”
Michael Saunders, former MPC member and senior economic adviser at Oxford Economics, expects a further cut this year and another early next year. He anticipates that rates could even fall as low as 3.25% by mid-2026.
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