The Bank of England cut interest rates by 25 basis points to 4.25% on May 8, 2025, as widely anticipated, marking its fourth cut since August 2024. The Monetary Policy Committee (MPC) voted 5-4, with two members favoring a larger 50 bps cut and two preferring to hold rates at 4.5%. The decision was driven by progress on disinflation, with CPI inflation at 2.6% in March 2025, though above the 2% target.
The Bank cited global trade uncertainties, particularly U.S. tariffs, and a weaker UK growth outlook, forecasting 0.75% growth in 2025, down from 1.5%. Inflation is projected to peak at 3.5% in Q3 2025 before easing. Governor Andrew Bailey emphasized a “gradual and careful” approach to future cuts due to persistent inflationary pressures and economic uncertainties.
Lowering rates to 4.25% reduces borrowing costs, potentially boosting consumer spending and business investment. This could support the UK’s sluggish growth, now forecast at 0.75% for 2025. The modest cut may not significantly stimulate demand, given global uncertainties like U.S. tariffs and domestic fiscal tightening from the October 2024 budget, which could dampen growth.
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Inflation Dynamics
With CPI at 2.6% and projected to hit 3.5% by Q3 2025, the cut could exacerbate inflationary pressures, especially if energy prices rise or supply chains face disruptions. The Bank’s cautious stance aims to balance growth support with preventing entrenched inflation, particularly as services inflation and wage growth remain sticky.
The rate cut and dovish signals weakened the pound, with GBP/USD dropping to around 1.27 post-announcement, as markets anticipate further easing. A weaker pound could raise import costs, adding to inflation. Markets now price in one to two additional 25 bps cuts in 2025, with the next cut likely by August. Bond yields, like the 10-year gilt, rose slightly to 4.5%, reflecting inflation concerns.
Lower rates ease pressure on mortgage holders, with around 700,000 fixed-rate deals due to roll off in 2025. However, real disposable income growth may be constrained by fiscal measures. Firms may delay investment due to trade uncertainties and a cautious MPC outlook, limiting the cut’s effectiveness. Potential U.S. tariffs under a Trump administration could disrupt UK exports, raising costs and complicating the BoE’s inflation-growth trade-off.
The BoE’s cut aligns with the ECB’s easing but contrasts with the Fed’s expected pause, potentially widening yield differentials and pressuring the pound further. The 5-4 split in the MPC reflects divergent views on the pace of monetary easing, highlighting uncertainty over inflation and growth trade-offs:
Rationale favored a 25 bps cut to support growth amid a weaker economic outlook and slowing inflation momentum. They view disinflation as “broadly on track” despite recent CPI overshoots, citing global disinflationary pressures and domestic demand weakness. Concerns emphasized gradualism due to persistent services inflation (around 5%) and wage growth (5.5%), which could keep inflation above target longer than projected.
Rationale likely argued for a bolder cut to counteract downside growth risks, especially from fiscal tightening and global trade threats. They may see inflation as less persistent, expecting global factors to suppress price pressures. This dovish stance aligns with Dhingra’s prior votes and reflects concerns about undershooting the 2% target if growth stalls.
Rationale advocated for caution, likely citing sticky services inflation, robust wage growth, and risks from U.S. tariffs or energy price shocks. They may view the economy as resilient enough to withstand higher rates, prioritizing inflation control. Key Figures included hawkish members like Catherine Mann or Jonathan Haskel, who have previously emphasized inflation risks.
The narrow vote signals ongoing debate within the MPC, potentially leading to volatile market expectations for future cuts. A shift in data (e.g., higher inflation or weaker growth) could tip the balance toward either dovish or hawkish dissenters. Bailey’s “gradual and careful” messaging aims to bridge the divide but risks being undermined if dissent grows, complicating forward guidance.
The split underscores the MPC’s reliance on incoming data, particularly on inflation, wages, and global developments, making future decisions less predictable. The BoE’s cautious cut and internal divide reflect a delicate balancing act. The MPC is navigating a post-Brexit economy with structural challenges, fiscal constraints, and external risks like U.S. policy shifts.
The 25 bps cut signals intent to support growth but risks being outpaced by inflationary pressures or undermined by global uncertainties. The 5-4 vote highlights the lack of consensus, suggesting markets and policymakers will remain highly sensitive to economic data and geopolitical developments in 2025.
