Bank of England Cuts Interest Rate to 5%

The Bank of England cut its key interest rate by 0.25 percentage points to 5 percent, marking the first reduction in over four years.

Why it matters: The decision reflects the Bank’s view that inflationary pressures have eased enough to justify a modest relaxation of monetary policy, despite better-than-expected economic growth in the first half of the year.

The details:

• The Monetary Policy Committee voted 5-4 in favor of the rate cut, with Governor Andrew Bailey and all deputy governors supporting the move.
• The Bank expects annual growth to accelerate to 1.5 percent in the current quarter, a full percentage point higher than its forecast three months ago.
• However, the Bank noted that “underlying momentum appears weaker,” citing business surveys and a cooling labor market with slowing wage growth.
• The Bank’s outlook on inflation has become more optimistic, with forecasts suggesting inflation could hover around 1.5 percent by the third quarter of 2027, well below its 2 percent target.

The Bank acknowledged that the risks to its forecasts for both growth and inflation were skewed to the upside, reflecting concerns from nearly half the MPC members who remain unconvinced by the reported slowdown in wage growth and services inflation.

What they’re saying:

• “Inflationary pressures have eased enough that we’ve been able to cut interest rates today,” Governor Andrew Bailey said. “But we need to make sure inflation stays low, and be careful not to cut interest rates too quickly or by too much.”
• New Chancellor of the Exchequer Rachel Reeves welcomed the rate cut as “welcome news” and critiqued the previous government’s financial legacy, while her predecessor, Jeremy Hunt, claimed that Labour had inherited “a stronger economy that was on the right track.”

What’s next: The first fiscal statement by Chancellor Reeves, scheduled for late October, will inform the MPC’s next forecast round in November. Financial markets had largely anticipated the rate cut, although questions remained about whether the Bank would err on the side of caution for another month.

Full story

The Bank of England cut its key interest rate by 0.25 percentage points to 5 percent. This is the first rate cut in more than four years. The Bank cited a cooled economy that justifies a modest relaxation of monetary policy.

Governor Andrew Bailey said in a statement, “Inflationary pressures have eased enough that we’ve been able to cut interest rates today. But we need to make sure inflation stays low, and be careful not to cut interest rates too quickly or by too much.”

The U.K. economy performed better than expected in the first half of the year. It grew an estimated 0.7 percent in both of the first two quarters.

The Bank expects annual growth to accelerate to 1.5 percent in the current quarter. However, the Bank noted in a quarterly policy report that “underlying momentum appears weaker.” It pointed to various business surveys and a steady cooling in the U.K.’s labor market. Wage growth has gradually slowed as hiring has eased.

The Bank expects growth to slow to 0.8 percent over the next year before accelerating to 1.4 percent and 1.7 percent in the subsequent two years.

U.K. economy sees interest rate cut

Meanwhile, the Bank’s outlook on inflation has become more optimistic.

Its latest estimates suggest inflation could hover around 1.5 percent by the third quarter of 2027, well below its 2 percent target. This is partly because the Bank anticipates the pound to be about 2 percent stronger over the entire forecast horizon, helping to keep import prices in check. The first fiscal statement by new Chancellor of the Exchequer Rachel Reeves is scheduled for late October.

Reeves welcomed the rate cut as “welcome news” and took the opportunity to critique the previous government’s financial legacy. The shift in the Bank’s thinking was led by Bailey and all deputy governors, including Clare Lombardelli, the new deputy governor for monetary policy. They all voted for the rate cut.

In contrast, Chief Economist Huw Pill and three external members voted for no change. Financial markets had largely anticipated the move, although there remained questions about whether the Bank would err on the side of caution for another month. The pound fell by around 1 percent against the dollar starting at 8 a.m. local time, raising suspicions of advance trading.

Bailey downplayed suggestions of a leak, stating, “There’s a lot going on in the world at the moment.” He referenced events in the U.S. where Federal Reserve Chair Jerome Powell hinted at possible policy easing in September.