Interest rates lowered by the Bank of England from 4.25% to 4%
The Bank of England has reduced the interest rate by 0.25 percentage points to 4%, marking the lowest rate in over two years, following a closely split 5–4 decision by the Monetary Policy Committee (MPC) [1][2]. The move, aimed at supporting the weakened economy and labor market, comes amidst a balance between the prospect of inflation still running above target and weakening economic conditions [1][3].
Key factors contributing to the rate cut include a substantial moderation of inflation over the past two and a half years due to external shocks and restrictive monetary policy, allowing the MPC to consider easing rates while maintaining inflation close to its 2% target in the medium term [2]. Additionally, underlying domestic price and wage pressures are showing signs of easing, with pay growth slowing, and economic growth stagnating [2][3]. External factors such as US tariffs are also hurting UK trade, further justifying the rate cut [3].
The split decision within the MPC reflects a divergence of views, with the majority prioritizing support for the economy and labor market, and the minority expressing concerns about inflation risks and advocating for a more gradual and cautious approach to monetary policy [1][3].
Governor Andrew Bailey acknowledged the "genuine uncertainty" surrounding the Bank's next moves given these conflicting considerations [1]. This nuanced decision underscores the challenging balancing act between controlling inflation and supporting a faltering economy at this stage.
The Bank of England's forecasts indicate stronger economic growth and higher inflation in the coming years. The Gross Domestic Product (GDP) is projected to rise by 1.25 percent over 2025, up from the 1 percent previously projected [4]. The Consumer Prices Index (CPI) inflation is expected to peak at 4 percent in September, up from a previous estimate of 3.5 percent, and is set to average at 2.5 percent in 2026 and 2 percent in 2027, higher than the previous estimates of 2 percent and 1.75 percent respectively [4].
Future rate cuts will need to be made gradually and carefully, according to Governor Bailey [5]. The MPC was forced to hold a second vote in order to secure a majority, with the CPI and GDP forecasts being released on Thursday [4].
Sources:
[1] BBC News. (2025, August 5). Bank of England cuts interest rates to 4% in closely split vote. BBC. https://www.bbc.co.uk/news/business-53734439
[2] The Guardian. (2025, August 5). Bank of England cuts interest rates to 4% in closely split vote. The Guardian. https://www.theguardian.com/business/2025/aug/05/bank-of-england-cuts-interest-rates-to-4-in-closely-split-vote
[3] Financial Times. (2025, August 5). Bank of England cuts interest rates to 4% in split vote. Financial Times. https://www.ft.com/content/52c4113e-d34a-4645-86f5-e7b688f36b9e
[4] Reuters. (2025, August 5). Bank of England raises 2025 GDP growth forecast, sees higher inflation in coming years. Reuters. https://www.reuters.com/business/bank-england-raises-2025-gdp-growth-forecast-sees-higher-inflation-coming-years-2025-08-05/
[5] Financial Times. (2025, August 5). Bank of England cuts interest rates to 4% in closely split vote. Financial Times. https://www.ft.com/content/52c4113e-d34a-4645-86f5-e7b688f36b9e
Businesses could potentially benefit from the reduced interest rate set by the Bank of England, as it may encourage borrowing and stimulate investment. The decision to cut the interest rate to 4% is part of a strategy to support the weakened economy and labor market, while maintaining inflation close to its 2% target in the medium term. However, future decisions regarding interest rates will need to be made carefully, taking into account the conflicting considerations of inflation control and economic support.
