The Bank of England’s Monetary Policy Committee (MPC) has voted by a narrow 5-4 majority to cut the base rate by 25 basis points to 4%, marking the third reduction in the current cycle. This unprecedented decision required two rounds of voting after initial divisions saw four members favouring a 25bp cut, one advocating a more aggressive 50bp reduction, and four voting to maintain rates at 4.25%.
Inflation Remains Stubbornly Elevated
June’s inflation data surprised to the upside, with headline CPI rising to 3.6% (from 3.4% in May), significantly exceeding the Bank’s 2% target. Core inflation climbed to 3.7%, while services inflation remained elevated at 4.7%, reflecting persistent domestic price pressures. The Bank now forecasts inflation will peak at 4% in September before gradually declining towards target by late 2026.
Economic growth continues to disappoint, with Q2 GDP expanding just 0.1% (Bloomberg estimates) following contractions of 0.3% in April and 0.1% in May. This falls substantially short of the Bank’s 0.25% Q2 growth projection. The labour market shows signs of softening, with unemployment rising to 4.7% (against forecasts of 4.6%) and private sector wage growth slowing to 4.9% in May from 5.3% in April.
Unprecedented Voting Procedure
The MPC’s decision-making process faced unusual complications, requiring a second vote – the first such occurrence in the Committee’s history. This reflects deepening divisions about the appropriate policy response to conflicting economic signals. The accompanying statement notably omitted previous language describing monetary policy as “restrictive,” suggesting a subtle shift in the Bank’s assessment of policy tightness.
Since commencing its easing cycle in August 2024, the Bank has delivered 125 basis points of cuts through a series of incremental moves:
- August 2024: 25bp cut
- November 2024: 25bp cut
- February 2025: 25bp cut
- May 2025: 25bp cut
- July 2025: 25bp cut
Outlook and Risks
The MPC maintains its data-dependent approach, emphasising no predetermined path for future rate moves. However, the statement highlighted increased vigilance regarding inflation risks, noting that “the temporary inflation spike could exert additional pressure on wage and price-setting behaviour.” Market expectations suggest potential further easing, with economists forecasting one additional 25bp cut by year-end.
The UK economy faces multiple headwinds, including a sluggish property market and declining business confidence. With the next MPC meetings scheduled for 18 September, 6 November, and 18 December 2025, policymakers will closely monitor whether the current inflationary pressures prove transitory or require a reassessment of the easing trajectory.
This decision comes against a backdrop of global central bank divergence, with the Federal Reserve maintaining higher-for-longer rates while the European Central Bank continues its own gradual easing cycle. The pound weakened modestly following the announcement, reflecting market uncertainty about the pace of future UK rate cuts.
