Key Takeaways
- The Bank of England has cut interest rates for the sixth time since last summer, taking base rates to below 4% for the first time since early 2023.
- The cut reflects concerns about a lacklustre economy, with no growth expected in the current final quarter of 2025.
- The Bank of England governor, Andrew Bailey, has stated that rates are still on a gradual path downwards, but the pace of cuts may slow down.
- The decision to cut rates was narrow, with the governor acting as the swing voter.
- The Bank of England believes that the headline rate of inflation will be closer to target by April, rather than in 2027, following the Budget and a sharp fall in inflation.
Introduction to the Rate Cut
The Bank of England’s decision to cut interest rates has been welcomed by many borrowers and businesses. However, the Bank has also sent out a cautionary message about the future pace of rate cuts. The cut, which takes base rates to below 4% for the first time since early 2023, reflects concerns about a subdued and lacklustre economy. With no growth expected in the current final quarter of 2025, the Bank is attempting to stimulate the economy and boost confidence among businesses and consumers.
The Bank of England’s Decision-Making Process
The decision to cut rates was a narrow one, with the governor, Andrew Bailey, acting as the swing voter. Bailey had previously voted to hold rates, but changed his stance this time around. The Bank’s Monetary Policy Committee (MPC) agrees that rates are still heading downwards, but some members who voted for the cut suggested that the pace of cuts may slow down from here. This uncertainty highlights the challenges faced by the Bank in making decisions about interest rates, and the need to balance competing factors such as inflation, growth, and confidence.
The Economic Outlook
The Bank of England’s cut reflects concerns about a lacklustre economy, with no growth expected in the current final quarter of 2025. This is a worrying sign, as it suggests that businesses and consumers are pausing investment and spending, and increasing savings. The Bank is hoping that the rate cut will help to stimulate the economy and boost confidence, but it is unclear whether this will be enough to make a significant difference. Much now depends on whether businesses and consumers regain confidence and start to invest and spend again, rather than sitting on their savings.
Inflation and the Budget
The Bank of England believes that the headline rate of inflation will be closer to target by April, rather than in 2027, following the Budget and a sharp fall in inflation. This is good news, as it suggests that the Bank’s efforts to control inflation are starting to bear fruit. The chancellor’s Budget measures are expected to take 0.5 percentage points off the headline rate of inflation, which will help to bring inflation back down to target. However, the Bank is still cautious about the outlook for inflation, and will be keeping a close eye on developments in the coming months.
The Future of Interest Rates
The future path of interest rates is uncertain, and will depend on a range of factors including inflation, growth, and confidence. The Bank of England’s governor, Andrew Bailey, has stated that rates are still on a gradual path downwards, but the pace of cuts may slow down from here. This suggests that the Bank is still committed to cutting rates, but is becoming more cautious about the need for further cuts. As the economy evolves, the Bank will need to adapt its policy stance to reflect changing circumstances, and it is likely that interest rates will remain a key tool in the Bank’s efforts to control inflation and stimulate growth.
