The Bank of England held a split vote among policy makers, reflecting deep uncertainty about the UK’s economic outlook, thus lowering interest rates to a minimum of more than two years.
In two historic rounds of votes, the bank’s Monetary Policy Committee (MPC) voted 5-4 for a 0.25 percentage point reduction, thus lowering the base rate from 4.25%. It marks the fifth quarter of the past 12 months, the first time since its inception in 1998 that the MPC needed two votes to make a decision.
The initial vote was evenly distributed, with four members preferring layoffs, four preferring to hold, and one vote for a larger 0.5 points. In the second round, five members supported a quarter of the final victory.
Although inflation rose to 3.6% in June, the cut was announced at noon Thursday, a carefully balanced move to support weakening the economy under pressure from tax rate hikes, lower consumer demand and rising unemployment.
“It’s a good balance decision,” Gov. Andrew Bailey said. “The future tax cuts will need to be progressive and cautious.”
The bank’s decision was signed in April and May, with a four-year high of 4.7 per cent and wage workers falling for five consecutive months, partly due to an increase of £25 billion in national insurance contributions in April.
Although inflation is expected to climb further to 4% in September, MPC majority believes that economic headwinds are now proving more adaptive policies.
“Inflation has made enough progress, but we’re also seeing higher layoffs and consumer spending for consumers,” the bank said.
Alan Taylor, an external MPC member who initially supported a larger reduction in tax rates, changed the vote in the second round, warning that if monetary policy remains too tight, it would warn of “increasing recession risk.”
But the bank’s chief economist Huw Pill and three other members voted on the holding tax rate, citing concerns over the wage price spiral and believed more data was needed to confirm the ongoing downward trend in inflation.
The bank now expects inflation to remain above its 2% target until 2026.
- Higher food and energy prices
- Minimum wages rise 6.7%
- Secondary inflation of NIC hikes in April
It also warned that inflation in September, which determines the rise in welfare and national pensions, could be higher – exacerbating speculation about increased fiscal pressure in the fall.
The bank added that President Trump’s upcoming tariffs could complicate the inflation background, which could reduce the discount on UK GDP by 0.2% in three years. However, rearrangement of goods from other countries may put down pressure on UK prices.
Despite the lowered tax rates, the bank has only moderately upgraded its growth forecast, with GDP forecasting 1.25% in 2025, 1.25% in 2026 and 1.5% in 2027.
The unemployment rate is now estimated at 4.9%, higher than the current 4.7%, reflecting job losses in multiple sectors.
“The economy remains vulnerable and the outlook is very uncertain,” the bank said. “Monetary policy is not on the preset road.”
The tax cuts provide some relief for mortgage holders, SMEs and retail borrowers, especially after two years of rapid increase in borrowing fees. However, ongoing inflation and rising wage bills continue to weigh employers’ confidence, especially in labor-intensive sectors.
Now, the market expects that the bank will make at least two cuts by mid-2026, with the base interest rate likely to reach 3.5%.
Economists warn that while lowering interest rates will help offset fiscal tightening (including increased national insurance and corporate tax revenue), businesses should prepare for continued volatility at home and abroad.
