Bank of England cuts interest rates by a quarter point to 4%

The Bank of England cut interest rates from 4.25% to 4% on Thursday as the central bank resumes a “gradual and careful” approach to lowering interest rates.

The BOE was widely expected to trim rates by 25 basis points at its latest monetary policy meeting, but traders and economists were keen to see the breakdown of support for the decision among the bank’s policymakers.

As it turned out on Thursday, the nine-member MPC voted by a majority of 5–4 to reduce the key interest rate, the “Bank Rate,” by 25 basis points rather than keeping it on hold.

Policy makers have had to weigh up sticky inflation — the consumer price index (CPI) rose to a hotter-than-expected 3.6% in June from 3.4% in May — with a cooling jobs market and lackluster growth. The U.K.’s gross domestic product contracted 0.1% month-on-month in May.

Despite the divergent views of policymakers at the BOE, economists expect the downward trajectory for interest rates to continue into next year.

Jack Meaning, chief U.K. economist at Barclays, said ahead of the latest policy meeting that he expected the BOE to continue with gradual, quarterly 25-basis-point cuts until the Bank Rate, its key interest rate, reaches 3.5% in February next year.

Ashley Webb, U.K. economist at Capital Economics, forecast that the central bank could loosen its monetary policy even further.

“Despite the unexpected rise in CPI inflation in June, we still think the weakness in the labour market means it’s only a matter of time before wage growth and inflation slow to rates consistent with the 2% inflation target. We think the Bank of England will cut interest rates from 4.25% now to 3.00% in 2026, which would take rates below the low of 3.50% priced into the financial markets,” he said in a note Wednesday.

Economists pointed to the labor market as a key factor in policymakers’ decisions, but said there was no “smoking gun” or conclusive evidence of a solid downturn in employment figures.

“The question looming over this meeting is whether a more worrisome deterioration in the jobs market is imminent,” James Smith and Chris Turner from ING said in a note, adding that “slack is undoubtedly building.”

“Payrolled employee numbers have fallen in seven out of the past eight months. The unemployment rate has risen by a few tenths of a percentage point this year … [and] vacancy data from Indeed suggests the U.K. jobs market has cooled further than in other major economies,” they noted.

But the analysts flagged this is a “slow-moving story,” with much of the weakness in the employment numbers concentrated in the hospitality sector, which was disproportionately affected by recent government tax hikes to the national minimum wage and payroll taxes.

“In other words, there’s no smoking gun that might prompt a fundamental rethink in the Bank’s outlook just yet. Meanwhile, the inflation data is still proving sticky,” the ING analysts said.