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The Bank of England (BoE) announced a 25 basis point cut to its benchmark interest rate on Thursday, bringing it down to 4%, in a bid to bolster a struggling jobs market. This move marks the fifth rate reduction in the past 12 months and comes as the U.K. economy continues to show signs of contraction.
A Response to Economic Strain
The decision to lower the Bank Rate follows concerns over a potential worsening of the labor market, with the BoE acting to support economic activity amidst a backdrop of faltering growth. The U.K. economy contracted for the second consecutive quarter in May, signaling a recessionary environment.
The rate cut, however, did not come without contention. The Bank of England’s Monetary Policy Committee (MPC) remains divided on the path forward. Four out of the nine members voted against the cut, opting to leave rates unchanged due to persistent inflationary pressures. This split highlights the balancing act faced by the central bank in addressing both economic stagnation and inflation.
Inflationary Pressures Persist
Despite the ongoing economic slowdown, inflation remains stubbornly above the BoE’s projections. In fact, some economists forecast inflation to hover around 4% in the coming months, double the BoE’s 2% target. This inflationary concern has led to caution within the central bank, with some policymakers wary of further rate reductions amid the risk of exacerbating price pressures.
Uncertainty Surrounds Future Cuts
While the Bank of England has taken action to ease monetary policy, the outlook for further cuts is unclear. Investors are largely anticipating another rate reduction in November, but beyond that, expectations are muted. The market is pricing in one or two more rate cuts in 2026, which would leave the Bank Rate at around 3.5% or 3.25%—still above the eurozone’s benchmark rate of 2%.
As the U.K. grapples with a mix of economic contraction and inflationary pressures, the BoE faces a difficult task in navigating a path that supports growth while controlling price stability. With economic uncertainty still prevailing, the central bank’s next moves will be closely watched by markets and policymakers alike.
