Bank of England cuts interest rates to 4%

August 7, 2025 (MLN): The Bank of England (BOE) has reduced its benchmark interest rate by 25 basis points, cutting the Bank Rate from 4.25% to 4%.

 The move, which had been widely anticipated by economists and traders, is the central bank’s latest step in what it calls a “gradual and careful” approach to easing monetary policy.

The decision came after a rare two-round vote by the BOE’s nine-member Monetary Policy Committee (MPC).

 Initially split with four members favoring holding rates, four supporting a 25 basis-point cut, and one backing a steeper 50 basis-point reduction, the committee held a second vote. A 5:4 majority ultimately favored the more moderate 25 basis-point cut.

The British pound reacted positively, rising 0.5% against the U.S. dollar to $1.3424 following the news.

Policymakers face a challenging economic landscape as headline inflation remains stubbornly above target, with the Consumer Price Index rising to 3.6% in June from 3.4% in May, defying expectations of further cooling, according to CNBC.

 At the same time, economic momentum is stalling. U.K. GDP contracted by 0.1% month-on-month in May, and signs of labor market weakness are mounting.

In a statement, the BOE emphasized its commitment to returning inflation to its 2% target in the medium term, noting the importance of staying vigilant against persistent inflationary pressures. “A gradual and careful approach to the further withdrawal of monetary policy restraint remains appropriate,” the MPC said.

BOE Governor Andrew Bailey reinforced the cautious tone at a press conference, warning that cutting rates too aggressively could backfire. “It remains important that we do not cut Bank Rate too quickly or by too much,” he said. “There are good reasons to think that this rise in headline inflation will not persist.”

The BOE’s latest move marks its fifth rate cut since the Labour government was elected in July 2024.

Chancellor Rachel Reeves welcomed the decision, saying it would help ease the cost-of-living pressures on households and businesses. “This is welcome news, helping bring down the cost of mortgages and loans,” she said to CNBC.

Still, the vote’s split nature underscores the confusion among policymakers as they try to reconcile conflicting economic data. George Brown, senior economist at Schroders, described the situation as “anything but clear.”

He suggested that another cut could come as soon as November, but only if disinflation shows more decisive progress.

Ashley Webb, U.K. economist at Capital Economics, echoed the view that more cuts are likely, albeit gradually.

“Despite the unexpected rise in CPI inflation in June, we still think the weakness in the labour market means it’s only a matter of time before wage growth and inflation slow,” he said.

Webb forecasted that the Bank Rate will fall to 3% by 2026 below current market expectations.

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