Bank of England cuts interest rates for fifth time in a year to 4% despite inflation fears

Neil Mehta, portfolio manager at RBC BlueBay:

‘It seems perplexing that the Bank of England has opted to cut interest rates again at a time when the Monetary Policy Committee (MPC) acknowledges that upside risks to medium-term inflation have increased, and headline CPI is projected to approach 4 per cent in the coming months.

‘The 2% inflation target, a cornerstone of price stability, appears to have been set aside in favour of concerns about a perceived softening in the labour market.

‘However, this justification is far from convincing, as labour market data remain ambiguous—skewed by changes to employer National Insurance contributions, a declining inactivity rate, and ongoing difficulties in data collection.

‘Furthermore, the broader UK economy shows few signs of a significant slowdown that would threaten domestic demand.’

David Hunt, head of savings at Investec Bank:

‘Today’s cut introduces uncertainty for savers and we anticipate a higher number to move their money into fixed rate products as they look to lock in attractive returns.

‘Investec Save’s research reveals that savers are voting with their feet, with 37 per cent planning to switch their funds into fixed rate savings accounts this year to beat rate cuts.

‘This is the fifth base rate cut since last summer and we predict there are still more cuts to come later this year and into 2026. Savers need to act quickly if they want to move their money to fixed rate accounts with higher rates as we’re likely to see these start to disappear from the market.’

Thomas Pugh, chief economist at RSM UK:

‘We still expect one more rate cut this year, but there is clearly a significant risk that the MPC chooses to “skip” it if there are signs that the labour market is improving or the budget looks inflationary.

‘The most interesting part of today’s decision was the vote split with five members voting for a 25bp cut and four voting for a hold after an initial 4-4-1 split.

‘That, along with the acknowledgement that the restrictiveness of monetary policy has fallen and the increase in the inflation forecast to 4%, puts a decidedly hawkish tint on the rate cut and raises the chances that the MPC chooses to “skip” a cut in Q4.

‘Looking ahead, the biggest question facing the MPC is to determine the degree to which the recent apparent weakness in the labour market is being driven by tax changes, or a weak economy and restrictive monetary policy.

‘Our judgement is that the labour market will continue to loosen over the rest of the year, providing enough cover for the committee to cut in November. However, that partly depends on what impact the budget will have on inflation.’

Rob Morgan, chief investment analyst at Charles Stanley:

‘Setting interest rates at an appropriate level is rather like balancing the clutch on a car. Set the rate too high and the economy stalls, too low and there’s an inflationary burst forward.

‘Presently, the BoE is most worried about stalling the engine, but the committee appear divided, with some members suggesting rates need to be cut more quickly, while others want to see the remaining puzzle piece of falling inflation before acting more concertedly.

‘The BoE’s focus has increasingly shifted toward labour market dynamics as a key driver of policy decisions, so these data sets remain very significant going forward to judge the extent to which rates are cut again before the end of the year.

‘With prices evolving broadly as pencilled in by previous BoE forecasts it is fair to expect the roughly quarterly cadence of rate cuts to continue. Yet as the three-way split on the voting committee shows, the competing forces of economic deterioration and sticky price rises obscure a clear view of the path.’

Here’s the Bank of England on how the MPC was forced into a second vote:

‘The Chair invited the Committee to vote on the proposition that Bank Rate should be reduced by 0.25 percentage points, to 4 per cent. Alan Taylor preferred to reduce Bank Rate by 0.5 percentage points, to 3.75 per cent.

‘In order to secure a majority decision on Bank Rate, the Chair then invited the Committee to vote on whether Bank Rate should be reduced by 0.25 percentage points, to 4 per cent, or Bank Rate should be maintained at 4.25 per cent.

‘Alan Taylor voted for a 0.25 percentage points reduction and this vote is recorded in this spreadsheet for August 2025.’

Richard Carter, head of fixed interest research at Quilter Cheviot:

“It appears the Bank of England is getting increasingly concerned about the health of the UK economy.

‘Unemployment is rising, while growth has ground to a halt once again after what now appears to have been a false dawn in the first quarter. As such, the BoE, while still concerned about its level, is putting inflation fears on the back burner as it looks to provide some relief to businesses and consumers.

‘The market hopes the Monetary Policy Committee will pull the trigger again this year, but as the division on the last few decisions shows, even that might be put in doubt with any small change to the data.

‘Today’s vote was on a knife-edge and required a second vote, with one member voting for a bigger rate cut, while four voted for no cut at all. This divergence in views makes interest rate decisions hard to forecast and highlights the difficult position the UK economy is in.’

Today’s decision marked the first ever time the Monetary Policy Committee has been forced into a second vote, demonstrating the uncertainty over the UK’s economic outlook

The Bank of England’s MPC voted by a majority of 5 to 4 to reduce base rate, with four members of the committee preferring to hold a 4.25 per cent.

In the first round, MPC Alan Taylor voted for an even bigger cut to 3.75 per cent.

It comes amid fears over the state of the UK economy with inflation reaching an 18-month high in June by climbing to 3.6 per cent, while unemployment rose to 4.7 per cent, its highest level in four years, in May.

It follows a 0.1 per cent GDP contraction in May, following a 0.3 per cent drop the previous month, and signs of growing pressure on the jobs market.

Sarah Pennells, consumer finance specialist at Royal London:

‘The Bank of England has cut the base rate to its lowest level since March 2023, which will be good news for borrowers who have a tracker or variable rate mortgage.

‘A lower base rate can reduce borrowing costs for those on a variable or tracker rate mortgage, but it also means savers may see lower returns on their savings.

‘Any reduction in mortgage payments will be welcome as more than half of mortgage borrowers have seen their monthly housing costs rise over the 12 months to March, by an average of £327. Single-adult households and renters are particularly vulnerable, with 71% of renters seeing their housing costs rise by an average of £233 a month in the same period.

“Falling interest rates can discourage people from saving, but building up an emergency fund is crucial to improve financial resilience. Our research shows that one in five people have less than £100 in savings, which means they are exposed to future rises in costs or unexpected bills.

‘That’s why it is important to seek financial advice or guidance, and ensure you’re making informed.’

The Bank of England’s Monetary Policy Committee has voted to cut base rate by 25 basis points to 4 per cent.

Last August, the base rate peaked at 5.25 per cent.

Since then there have been four cuts and a fifth is expected today.

Let’s remind you of the previous decreases and when they happened.

August 2024 – Interest rate cut from 5.25 per cent to 5 per centNovember 2024 – Cut from 5 per cent to 4.75 per centFebruary 2025 – Cut from 4.75 per cent to 4.5 per centMay 2025 – Cut from 4.5 per cent to 4.25 per cent

We’re expecting to hear from Andrew Bailey this afternoon following the announcement of the new interest rates.

Alongside that decision, the Bank will also release new forecasts for the UK economy covering the next three years.

It will also update investors on whether government bond sales have affected the gilt market.

Mr Bailey (pictured last month) is expected to speak at around 12:30pm.

Today’s interest rates decision comes as economists speculate what Chancellor Rachel Reeves will do to balance the books in the upcoming autumn Budget.

Earlier this week, an economic thinktank said Ms Reeves will have to find £51billion annually in higher taxes or lower spending by 2029/30.

The National Institute of Economic and Social Research (NIESR) found the Chancellor’s ‘wafer thin’ headroom of £9.9billion she left herself last year has been wiped out, and there is now a budget deficit of £41.2billion.

Speaking yesterday, Sir Keir Starmer refused to rule out further tax hikes in the next Budget. The Prime Minister said Ms Reeves would focus on ‘living standards’ and ‘making sure that people feel better off’ in Labour’s next fiscal package.

The FTSE 100 hit a fresh record yesterday as traders placed bets on another interest rate cut from the Bank of England.

The index closed up 0.2 per cent, or 21.58 points, at 9164.31 after a similar record-breaking session on Tuesday when it passed 9142.

Traders shrugged off concerns about a trade war between the US and India after Donald Trump announced he would slap a 50 per cent tariff on goods from the South Asian nation in response to its importing of oil from Russia.

The FTSE 100 was led higher by insurer Hiscox, which jumped 9.4 per cent, or 119p, to 1379p after it announced it would be increasing its stock buyback plans by £75million.

Read the full story by Calum Muirhead here:

Economists are predicting Bank of England economists will be split on whether to cut interest rates today but added another reduction was ‘almost certain’.

Experts say the cut could help stimulate spending as businesses face higher labour costs while tariffs imposed by Donald Trump have added to global uncertainty for investors.

Matt Swannell, chief economic advisor to the EY Item Club, said a 0.25 percentage point cut was ‘almost certain’ amid a ‘sluggish’ economy.

With the MPC balancing signs of fragility in the labour market against evidence of lingering inflationary pressure, the committee will likely signal that further gradual interest rate cuts remain appropriate.

Sanjay Raja, senior economist for Deutsche Bank, said the economy has been ‘weaker than the MPC anticipated’ since it last published a Monetary Policy Report in May.

However, he said the MPC will be ‘between a rock and a hard place’, likely leading to a split vote within the nine-person committee.

House prices jumped at their fastest rate since January with home buyers boosted by falling mortgage rates.

According to Halifax, the average UK property value increased by more than £1,000 in July to £298,237, up 0.4 per cent from £297,157 in June.

It marks a return to price growth after a slump resulting from the end of tax breaks on stamp duty in April with the change adding thousands of pounds to the purchase price of most properties.

A lower base rate announced today could further reduce monthly mortgage costs for some and raise hopes cheaper deals will enter the market for those looking to join the housing ladder.

Speaking ahead of the Bank of England’s interest rates decision, one financial expert has said how investors will be hoping a reduction to 4 per cent will help restore consumer spending and business confidence.

Susannah Streeter, head of money and markets at Hargreaves Lansdown, said:

Investors are grasping for silver linings to the tariff turmoil and there’s an expectation that that weaker growth will lead to lower borrowing costs.

Investors are primed for an interest rate cut from the Bank of England later today, given the highly sluggish nature of the economy, and the rising unemployment rate.

There will be hopes that if loans become cheaper, it will help boost consumerecon and business confidence but there’s a long way to go.

If the Bank of England cuts interest rates today – many may be thinking how it affects them.

Essentially, a lower base rate can reduce the monthly mortgage costs for some homeowners but it also delivers a smaller return for savers.

Cutting interest rates can help support economic growth through lower borrowing costs, yet bolstering economic output could lead to new inflationary pressures.

Labour have taken credit for four reductions interest rate cuts before today’s announcement but with inflation and unemployment rising economists may wander whether future decreases are sustainable.

Economists think a slowdown in the UK jobs market and stagnant economic growth could prompt the MPC to further ease monetary policy.

Earlier this year, official data from the Office for National Statistics (ONS) showed the rate of UK unemployment increased to 4.7 per cent in the three months to May – the highest level for four years.

And average earnings growth, excluding bonuses, slowed to 5 per cent in the period to May to its lowest level for almost three years.

Bank of England Governor Andrew Bailey said earlier this month that the Bank would be prepared to cut rates if the jobs market showed signs of weakening.

Good morning and welcome to our live coverage as the Bank of England is expected to announce a cut to interest rates in its latest decision on the base rate at 12pm.

The bank’s nine-strong Monetary Policy Committee (MPC) is tipped to reduce the rate by 0.25 percentage points to 4 per cent – the third decrease this year and fifth in a year since borrowing costs peaked at 5.25 per cent last August.

Such a move will help release pressure on some mortgage holders and those to looking to join the housing ladder but comes amid growing fears about the UK’s sluggish econonmy.

Inflation reached an 18-month high in June after climbing to 3.6 per cent, while unemployment rose to 4.7 per cent, its highest level in four years, in May.

We will bring you the latest news and analysis throughout the day with reaction to come from Bank of England Governor Andrew Bailey and Chancellor Rachel Reeves.