In a closely split decision, the Bank of England (BoE) has lowered its base rate by 25 basis points (bps) to 4%, marking its third rate cut in 12 months and signalling a cautious shift in its inflation-fighting stance. The move, agreed by a narrow 5-4 majority within the Monetary Policy Committee (MPC), reflects growing concern about soft economic activity, signs of slack in the labour market, and continued disinflation in core price pressures.

While headline inflation ticked up in the second quarter and is forecast to peak at 4% in September, the MPC judged that temporary drivers, mainly food and energy, are to blame. Beneath the surface, wage growth is moderating, services inflation is steady, and economic momentum remains weak. For the majority on the Committee, these trends justify further easing.

The vote, however, exposed a clear divide in the BoE’s policy thinking. One member backed a larger 50 bps cut. Four wanted no change at all, citing persistent inflation risks and high business and consumer expectations. The 5-4 result underscores the challenge of balancing inflation control with the need to support a stalling economy.

Disinflation continues, but slowly

Since reaching double digits in 2022, inflation in the UK has eased significantly. The headline Consumer Prices Index rose to 3.6% in June, driven by higher energy, food and regulated prices. However, core inflation has been broadly stable. Services inflation, a key focus for the MPC, held steady at 4.7% in June, with underlying measures pointing to a slower but continued moderation.

Private sector wage growth, which has been stubbornly high, has now started to decline. Annual regular pay growth dipped below 5%, weaker than expected in the BoE’s May projections, and is forecast to fall further to around 3.75% by year-end. Pay settlements, survey data, and intelligence from the BoE’s Agents all point to softer wage dynamics ahead.

Still, the MPC remains cautious. While easing pay pressures should help bring services inflation down over time, the pace of that pass-through is uncertain. Some members expressed concern that the recent uptick in headline inflation, which is expected to peak in September, could influence wage and price-setting behaviours. The August Monetary Policy Report noted that high-profile increases in food and energy prices might shape household expectations more than underlying data suggests.

The Committee's overall judgment was that medium-term inflation risks have edged up slightly since May, but not enough to prevent a majority from supporting a rate cut.

Slack builds in the labour market

The latest data also indicate a softening labour market, providing room for monetary easing. The unemployment rate rose in the three months to May, and vacancies remain below estimated equilibrium levels. Employment growth has been weak, held back by both soft demand and rising business costs.

Some Committee members viewed these developments as clear signs of spare capacity emerging in the economy, helping to dampen inflation pressures. Others were less certain, suggesting that structural changes in the labour market might limit the extent to which slack will grow in future.

Nonetheless, the BoE believes that a margin of slack has opened, which should act as a counterweight to lingering inflation persistence. Consumption growth remains fragile, and the Bank sees upside risks to the household saving ratio, including the possibility of increased precautionary saving.

This subdued picture was a key factor behind the majority decision to cut rates. For some, the combination of weak activity, softer wage growth and stable services inflation was enough to justify another step towards normalising policy.

Growth stalls amid external drag

UK GDP contracted slightly in April and May, falling by 0.3% and 0.1% respectively, after stronger growth earlier in the year. The MPC believes that earlier strength was partly driven by front-loaded activity, likely in response to changes in tariffs and domestic tax rules.

The Bank estimates that growth was just 0.1% in the second quarter, with a modest rebound to 0.3% expected in Q3. Surveys such as the S&P Global UK PMI suggest a tentative improvement in output expectations, but overall momentum remains weak.

Internationally, trade tensions have eased slightly. The US has struck new agreements with trading partners, including the US, reducing tariff-related uncertainty since May. While global demand is expected to be a little stronger as a result, these developments had limited impact on the BoE’s policy deliberations. More important was the domestic backdrop of subdued demand and financial conditions.

On that front, markets had broadly anticipated a rate cut. Almost all participants in the Bank’s latest Market Participants Survey expected a reduction in August, in line with market pricing. Financial conditions had loosened slightly since June, with lower equity risk premia and tighter credit spreads, further supporting the case for easing.

A policy divide sharpens

The 5-4 vote highlights diverging views within the MPC. Four members, including Governor Andrew Bailey, voted to cut rates by 25 bps, while a further four voted to maintain the previous rate. The outlier member, Alan Taylor, initially favoured a 50 bps reduction but backed the 25 bps cut in the final vote to form a majority.

These five members saw “sufficient progress” in the disinflation process, especially in wages and employment. For them, the risk was that waiting too long to ease might leave policy overly restrictive, weighing further on already fragile activity.

Taylor, who preferred a larger cut, warned that the inflation peak was “dominated by one-off changes” and not driven by underlying demand. With wage growth slowing, energy prices stable, and sentiment subdued, he argued for a more decisive step to head off recession risks.

By contrast, the four dissenting members, Megan Greene, Clare Lombardelli, Catherine Mann and Huw Pill, argued that inflation persistence remained too high. They pointed to elevated inflation expectations among households and businesses, and the potential for further second-round effects. These members preferred to wait for more evidence that disinflation was firmly entrenched before easing further.

No fixed path

The MPC was clear that this rate cut does not mark a pre-set course. “The timing and pace of future reductions... will depend on the extent to which underlying disinflationary pressures continue to ease,” the Committee stated. Monetary policy, it emphasised, remains data-dependent.

The BoE also acknowledged that policy is becoming less restrictive as rates fall. Past tightening continues to weigh on demand, contributing to the disinflationary process, but the impact is fading. As a result, future moves will need to weigh risks on both sides: easing too quickly could reignite inflation; too slowly, and the economy could slip further into stagnation.

The narrow vote reflects this tension. Policymakers are navigating an uneven recovery, with inflation proving stickier in some areas, even as demand cools. Domestic data will be key in the months ahead, particularly on wages, employment, services prices, and inflation expectations.

Market reaction and outlook

“The recent rate cut by the Bank of England comes at a key moment for the UK economy,” commented Melissa Di Donato, CEO of Kyriba. “As the fifth cut in a year, monetary easing may provide some added relief, particularly amid job market softness. But the uncertainties of global trade tensions are weighing on growth, and inflation is still a concern, it's well above the 2% target - adding complexity to the broader economic picture. I do think the government’s push for development, including major projects like the expansion of Heathrow Airport and the construction of 1.5 million new homes, signals confidence in the UK's long-term growth. Infrastructural projects of this scale mean businesses across supply chains need to manage cash flows efficiently, ensuring capital is allocated strategically to support both growth and investment. The organisations that embrace technology to enhance liquidity, optimise working capital, and mitigate currency risk are the ones that will be in the best position to navigate volatility and capitalise on new investment opportunities. For CFOs and financial leaders, it is not just about responding to economic change but about creating opportunities within it.”

Looking ahead, the majority view is that inflation is on track to return to target, the labour market is loosening, and the UK economy needs support. But policymakers remain divided on how quickly and how far to go. For now, the MPC has taken another small step toward easing, just as the economy shows growing signs of strain.