In a landmark decision marked by deep internal division, the Bank of England has cut its benchmark interest rate by 25 basis points to 4 percent, following a narrow 5–4 vote by its Monetary Policy Committee (MPC). The announcement, made on August 7, 2025, reflects the central bank’s attempt to balance persistent inflationary pressures with mounting signs of economic slowdown. This marks the fifth rate cut since August 2024 and the lowest level since March 2023.
Key Highlights from the August 2025 Rate Decision:
- The Bank of England reduced the base rate from 4.25% to 4%
- The MPC vote was split 5–4, requiring a rare second round of voting to reach consensus
- Inflation rose to 3.6% in June, well above the Bank’s 2% target
- Unemployment climbed to 4.7%, the highest in four years
- The Bank now forecasts GDP growth of 1.25% in 2025, slightly up from previous estimates
Historic Two-Round Vote and Internal Division
The MPC’s decision was anything but straightforward. Initially, four members voted to hold rates, four voted for a 25 basis point cut, and one member—Alan Taylor—voted for a larger 50 basis point reduction. This unprecedented split led to a second round of voting, where Taylor shifted to support the quarter-point cut, tipping the balance in favor of easing.
- Governor Andrew Bailey and members Sarah Breeden, Dave Ramsden, Swati Dhingra, and Taylor ultimately backed the cut
- Deputy Governor Clare Lombardelli broke ranks for the first time, voting to hold rates alongside Megan Greene, Catherine Mann, and Huw Pill
- Bailey described the outcome as a “finely balanced decision,” emphasizing caution in future rate moves
Inflation vs. Growth: The Policy Dilemma
Despite the rate cut, inflation remains stubbornly high. The Bank expects it to rise to 4% in September before gradually easing to 2.5% in 2026 and 2% in 2027.
- Food and energy prices continue to drive inflation, exacerbated by supply chain disruptions and new fiscal policies
- April’s £25 billion hike in employers’ National Insurance contributions has added pressure on wages and prices
- The Bank warned that upcoming packaging waste regulations could add 0.5 percentage points to inflation later this year
Economic Headwinds and Recession Risk
The decision to cut rates comes amid growing concerns about recession.
- GDP contracted in April and May, and payrolled staff numbers have declined for five consecutive months
- Taylor cited an “increased risk of recession” as justification for his initial push for a deeper rate cut
- The Bank’s forecast suggests unemployment could reach 5% by mid-2026
Impact on Borrowers and Savers
The rate cut is expected to provide modest relief to borrowers but may further erode returns for savers.
- Tracker and variable-rate mortgage holders will see immediate reductions in monthly payments
- Fixed-rate borrowers will benefit only upon renewal, with future rates likely to reflect the easing trend
- Savings rates have already declined, with average easy-access accounts dropping from 3.15% to 2.68% over the past year
Conclusion
The Bank of England’s decision to cut rates to 4% underscores the complexity of navigating a fragile economic landscape. With inflation still elevated and growth faltering, the MPC’s split vote reflects the tension between caution and stimulus. As the UK braces for further fiscal tightening and global trade uncertainties, the central bank’s next moves will be closely watched by markets, policymakers, and households alike.
Source: Moneycontrol
