Bank of England lowers interest rate to 4.75%, signals gradual cuts amid inflation concerns

The Bank of England (BoE) on Thursday cut interest rates for only the second time since 2020, reducing the rate from 5% to 4.75%. The Monetary Policy Committee (MPC) voted decisively, with an 8-1 majority, to implement the cut—a stronger endorsement than anticipated in recent polling, where a 7-2 split was expected. Catherine Mann was the lone dissenter, arguing to keep rates steady.

BoE Governor Andrew Bailey, addressing the bank’s cautious stance, highlighted the need to control inflation. "We need to ensure inflation stays close to target," Bailey said, adding that the pace of future rate cuts would be gradual to avoid destabilizing the economy. He indicated that, if the economic landscape remains aligned with BoE projections, additional rate reductions could continue, albeit cautiously.

The rate cut follows Finance Minister Rachel Reeves' recent budget, which introduced significant tax hikes, increased public spending, and expanded borrowing. The BoE projects these measures could boost the UK economy by around 0.75% next year but would offer limited improvement to growth over a longer period. The fiscal changes are also expected to add approximately 0.5 percentage points to inflation at its peak, which would delay the inflation rate's return to the BoE’s 2% target by about a year.

The BoE’s approach contrasts with expectations around the European Central Bank, which some investors predict will adopt a more aggressive rate-cutting path. However, financial markets have already scaled back expectations for future BoE rate cuts, with forecasts for 2025 now reduced to two or three rate adjustments, down from around four projected prior to the budget. The BoE's statement avoided mention of broader global political factors, like Donald Trump’s U.S. election victory, which had influenced market bets on the U.S. Federal Reserve’s approach to rate cuts.