Bank of England Cuts Interest Rates to 4% Amid Economic Concerns

The Bank of England's Monetary Policy Committee (MPC) has reduced the benchmark interest rate by 0.25 percentage points to 4%, marking the lowest level since March 2023. The decision, announced on August 7, 2025, was narrowly passed with a 5-4 vote, highlighting internal divisions within the committee.

This rate cut is the fifth since August 2024, when the rate stood at a 16-year high of 5.25%. The move aims to stimulate the UK's sluggish economy, which has been grappling with persistent inflation and rising unemployment. Inflation was recorded at 3.6% in June, exceeding the Bank's 2% target, primarily due to temporary spikes in food and energy costs. Economic growth slowed to 0.1% in the second quarter of 2025, and unemployment rose to 4.7%, the highest in four years.

Governor Andrew Bailey described the rate cut as a "finely balanced decision" and indicated that future reductions would be gradual due to uncertainties surrounding inflation and economic growth. He stated, "We expect to be able to cut bank rate further as the disinflation process continues. But we will have to judge meeting by meeting how far and how fast."

The MPC's decision was reached after two rounds of voting, a first in the committee's history. In the initial round, one member voted for a 0.5 percentage point cut, while four members preferred to maintain the current rate. In the second round, the member advocating for a larger cut shifted to support the 0.25 percentage point reduction, resulting in the narrow 5-4 outcome.

Market reactions were immediate. The pound strengthened to $1.3413, and two-year gilt yields rose slightly as investors adjusted their expectations for future monetary policy. The FTSE 100 fell by 0.7%, reflecting market uncertainty regarding the economic outlook and potential future rate cuts.

The rate cut has mixed implications for consumers and businesses. Lower interest rates can reduce borrowing costs for mortgages and loans, potentially stimulating spending and investment. However, persistent inflation erodes purchasing power, particularly affecting lower-income households. The rise in unemployment to 4.7% indicates a weakening labor market, which could lead to increased financial strain for many families.

This is the fifth rate cut since August 2024, when the Bank began reducing rates from a 16-year high of 5.25%. The current rate of 4% is the lowest since March 2023. The narrow vote and internal divisions within the MPC highlight the challenges in balancing the need to control inflation with the desire to stimulate economic growth.

The Bank of England's latest rate cut reflects a delicate balancing act between fostering economic growth and controlling inflation. The narrow vote and cautious messaging suggest that future monetary policy decisions will be approached with prudence, as the central bank navigates a complex and uncertain economic environment.