The Bank of England made a significant move on Thursday, May 8, 2025, by cutting interest rates to 4.25% from the previous 4.5%. This reduction marks the first cut since February, the second in 2025, and the fourth in the current easing cycle. Interestingly, the decision was not unanimous, with a voting ratio of 7:2, contradicting earlier expectations of a unanimous decision.
The Monetary Policy Committee (MPC) of the Bank of England had a divided stance on the matter. Five members, including Andrew Bailey, the Governor of the Bank of England, supported a cut of 25 basis points, while two members, Huw Pill and Mann, voted to maintain the interest rates. In contrast, Dhingra and Taylor advocated for a more substantial cut of 50 basis points. The decision was slightly delayed by two minutes due to the observance of the anniversary of Victory in Europe Day.
The market reacted swiftly to the announcement, with investors expressing skepticism about the likelihood of further rate cuts in June 2025. By Thursday afternoon, futures market indicators suggested that the probability of another reduction stood at a mere 26%. This uncertainty has led to a strengthening of the British pound, as the lack of consensus within the MPC may signal difficulties in achieving agreement on future cuts.
One of the primary drivers behind the decision to cut rates was the slowing inflation rate, which fell to 2.6% in March, lower than anticipated. The MPC highlighted that trade uncertainties played a significant role in the decision-making process. Those who voted for the 25 basis points cut cited these uncertainties as their main concern, while those advocating for a larger cut emphasized inflationary pressures.
Despite the reduction, the Bank of England has made it clear that it will pursue a gradual approach to further monetary policy adjustments. The central bank does not adhere to any predefined path, indicating flexibility in its decision-making process. The MPC underscored the importance of maintaining relatively restrictive interest rates to achieve long-term inflation targets.
Looking ahead, the Bank of England's new forecasts suggest that the UK’s GDP growth will average around 1% for 2025, an improvement from the previous projection of 0.75%. This increase is largely attributed to unexpectedly strong growth in the first quarter of the year. However, the forecast for 2026 has been revised down to 1.25%, a decrease from the earlier estimate of 1.5%. Additionally, the global economic growth forecast has also been lowered to 1.5% in 2026 from 2% due to new US tariffs and increased uncertainty surrounding global trade.
As the economic landscape continues to evolve, the Bank of England remains cautious. The MPC's decision reflects a careful balance between stimulating growth and controlling inflation. The differing opinions within the committee highlight the complexities of navigating the current economic challenges. Investors and analysts alike will be closely monitoring future meetings of the MPC to gauge the central bank's direction.
In summary, the Bank of England's recent interest rate cut reflects ongoing economic uncertainties and the need for adaptive monetary policy. With inflation pressures and global trade dynamics at play, the central bank's decisions will be crucial in shaping the UK's economic trajectory in the coming months.
