Bank of England Cuts Interest Rate to 4.0% Amid Weakening UK Economic Performance

Strategic Insights -

The Bank of England's monetary policy committee reduced the benchmark interest rate by 25 basis points to 4.0%, citing signs of continued disinflation and subdued economic growth. The decision continues a year of gradual policy loosening after the UK's aggressive tightening cycle in response to post-pandemic inflation spikes. While headline CPI inflation ticked up to 3.5% in the second quarter, the Bank now expects it to peak at 4.0% in September, an increase from its previous forecast peak of 3.7% in that same month.

Key Takeaways:

  • The Bank of England's monetary policy committee voted 5-4 to reduce the benchmark interest rate to 4.0% from 4.25%.
  • The decision was made due to signs of continued disinflation and subdued economic growth, with the Bank expecting headline CPI inflation to peak at 4.0% in September.
  • Pay growth has slowed recently and is forecast to moderate further through the year, with underlying GDP growth staying soft.
  • The MPC remains focused on squeezing out any existing or emerging persistent inflationary pressures and warns that the outlook remains finely balanced.
  • The BoE's new forecasts show inflation remaining slightly higher over the short term than previously expected, with private-sector wage growth expected to slow more gradually.
  • GDP growth for 2025 is seen at 1.25%, slightly firmer than the 1.0% previously projected, while the unemployment rate is expected to rise to 4.9% in Q4 this year and remain there next year.

Statistics:

  • Interest rate: 4.0%
  • Previous interest rate: 4.25%
  • Inflation forecast peak in September: 4.0%
  • Inflation forecast in one year's time: 2.7% (up from 2.4%)
  • GDP growth forecast for 2025: 1.25% (up from 1.0%)
  • Unemployment rate forecast in Q4 this year: 4.9% (up from 4.7%)

Sources:

  • "Bank of England announces 25 basis point rate cut to 4.0%" (The Telegraph)
  • "Bank of England cuts interest rate to 4.0%" (BBC News)
  • "Bank of England data and forecasts" (Bank of England, MPC meeting minutes)