The Bank of England has responded by lowering interest rates five times to 4.25%. Their reasoning behind this decision was their more guarded perspective toward growth and sustained inflationary pressures. This was the Monetary Policy Committee’s (MPC) first decision at their most recent meeting. They’re acting in relation to predictions that UK inflation will remain well above the 2% target until 2027.
The MPC is clearly determined to restore its inflation target, but that’s not expected to occur until spring 2027. This continued delay leaves the UK economy in a difficult position. The Bank stated that economic growth “is judged to have slowed and is expected to remain subdued in the near term.” This marked stagnation is a symptom of the continued uncertainty being sowed by US trade policy as well as the larger UK economic picture.
Even with the recent interest rate decrease, growth is expected to continue to be nearly flat through the end of this year. The National Institute of Economic and Social Research recently cautioned that inflation would stay above the 2% target. That trend looks to continue through 2026. Persistent inflation has complicated the situation and limited the Bank of England’s options to make larger rate cuts. Just one additional cut after this one is in store in 2025.
We have inflation peaking in the third quarter at an average of 3.5%. The Bank of England pointed to a few reasons why inflation will continue to come down. Cheaper imports from China and other countries targeted by U.S. tariffs top that list. What’s new is a projected drop in inflation due largely to increased gas and oil supply lowering energy costs.
The Bank of England remarked, “World export prices are expected to be materially weaker, particularly in China,” indicating a shift in global economic conditions that may benefit the UK market.
Financial markets are crackling with optimism. They now anticipate a minimum of two additional quarter-point cuts in borrowing costs before the year is out. In that regard, the Bank has clearly signaled a hawkish tone. The market is most concerned about the depth of the cuts with inflation still a major issue.
In a close 5–4 vote, two of the MPC’s nine members advocated for a larger cut of 0.5 percentage points. At the same time though, another two members preferred holding interest rates at 4.5%. This division illustrates the contrasting opinions on the most effective way to navigate monetary policy in today’s unpredictable economic climate.
Andrew Bailey, Governor of the Bank of England, addressed the situation stating, “Inflationary pressures have continued to ease so we have been able to cut rates again today. The past few weeks have shown how unpredictable the global economy can be.” He further emphasized the importance of a cautious approach, adding, “That’s why we need to stick to a gradual and careful approach to further rate cuts. Ensuring low and stable inflation is our top priority.”
This announcement is interesting and important in many ways — far beyond affecting economic indicators. The Chancellor, Rachel Reeves, shudders at the political storm raging in the wake of the MPC’s decision. Elections & the economy Policymakers will be paying close attention to the ongoing battle to tame inflation. They can’t simply build, though – they need to focus on spurring economic development.