The Bank of England (BOE) lowered interest rates by 25 basis points to 4% on Thursday, the lowest level in more than two years.
The move came in a closely contested decision that revealed sharp divisions within the central bank over how to balance persistent inflation pressures with emerging signs of weakness in the labour market.
The decision marked the first time in the 28-year history of the Monetary Policy Committee (MPC) that two rounds of voting were required to reach a presentable outcome.
Five members of the nine-person panel voted in favour of the cut, while four opted to keep rates unchanged.
A previous three-way split had failed to produce a majority.
Sterling rises, Gilts drop as market recalibrates
The pound rose 0.5% to $1.3428 following the announcement, reflecting market surprise at the rate cut.
UK government bonds (gilts) sold off, pushing the two-year yield six basis points higher to 3.88%, as traders reduced expectations of further aggressive easing from the BOE over the coming year.
“It was a finely balanced decision,” Governor Andrew Bailey said in a written statement.
He reiterated that interest rates remain on a downward trajectory but warned that future cuts will need to be “gradual and careful.”
Divergence from Fed as BOE warns of economic slack
The split highlights the growing divergence between the BOE and the US Federal Reserve, which has refrained from cutting rates so far this year amid persistent inflationary concerns.
President Donald Trump has criticised the Fed for its inaction.
At the BOE, the division underscores differing views on whether policy should prioritise containing a renewed inflation spike or supporting a faltering labour market.
Tax data suggest the UK economy has shed approximately 185,000 jobs since the Labour government’s announcement to increase employers’ payroll taxes and the minimum wage.
The BOE’s updated projections now expect inflation to reach 4% in September, up from a previously forecasted peak of 3.7%.
Rising food prices were cited as a key contributor to the upward revision.
The MPC warned that upside risks to inflation have “moved slightly higher since May” and added that it “remains alert” to second-round effects.
Growth upgraded, but outlook remains tepid
Despite the inflation concerns, the central bank upgraded its economic growth forecast for 2025 to 1.25%, citing a stronger-than-expected first quarter.
However, it noted that the broader economic backdrop remains soft.
“Underlying UK GDP growth has remained subdued, consistent with a continued, gradual loosening in the labour market,” the statement read.
The minutes also indicated that monetary policy was becoming less restrictive as interest rates declined, but signalled that further easing would be conditional on sustained disinflationary progress.
“The timing and pace of future reductions in the restrictiveness of policy will depend on the extent to which underlying disinflationary pressures continue to ease,” the committee said.
Markets had been pricing in at least one more rate cut by the end of 2025, potentially bringing the policy rate to around 3.5%.
Thursday’s cut marks the fifth reduction since the BOE began its easing cycle a year ago and maintains its once-a-quarter pace.
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