Uncertainty Surrounds Possibility of Further Interest Rate Reductions, as Per Bank of England
The Bank of England (BoE) has signalled a cautious approach to future interest rate cuts, as persistent inflation concerns continue to cast a shadow over the UK economy.
In a recent vote, the Monetary Policy Committee (MPC) narrowly decided to reduce the Bank Rate by 0.25 percentage points to 4%, marking the third rate cut this year. This move comes amid stagnating UK growth and rising inflation, with the Consumer Price Index (CPI) at 3.5% in Q2 2025.
Economists at Pantheon Macroeconomics predict only one more interest rate cut for the remainder of the year, as the BoE seems to be nearing the end of its rate-cutting cycle. Analysts at consultancy Pantheon Macroeconomics have noted the Bank's focus on inflation, with policymakers becoming wary about potential echoes of 2022, where a spike in food and energy prices prompted a longer-lasting episode of higher inflation.
The Bank's rate-setters aim to "tamp down market eagerness to price quarterly rate cuts," as the market is currently pricing in another interest rate cut in November and again in February, potentially bringing the base rate to 3.5%. However, Governor Andrew Bailey has stated that the Bank would not cut rates "too quickly or by too much."
Economists have noted the risk of food prices increasing due to packaging regulation and extra labor costs imposed via the hike in employers' national insurance contributions. Inflation is predicted to reach a peak of 4% in September, according to the Bank.
The payroll data is falling gradually, with the deterioration concentrated in the hospitality sector. Despite this, the BoE seems unfazed by a deterioration in the jobs market. However, AJ Bell's Laura Suter has expressed concern about the future of interest rates, while BlackRock Investment Institute's chief UK strategist Vivek Paul suggests a rapid deterioration in growth would prompt the Bank to cut interest rates.
The BoE faces a delicate balancing act. On one hand, it needs to cut rates to support an economy facing stagnation and external trade pressures. On the other hand, it must avoid loosening monetary policy so much that inflationary pressures might resurface or the jobs market becomes overheated. The MPC's split vote and statements reflect this cautious stance, with some members advocating a “gradual and careful” approach that might delay further cuts.
In conclusion, the BoE has started to lower rates to stimulate growth, but it is likely to proceed cautiously with future rate cuts due to ongoing inflation risks and the need to monitor wage and price pressures carefully. The trajectory will depend significantly on evolving economic conditions, including inflation developments, labor market data, and international trade impacts.
References: [1] BBC News (2025). Bank of England cuts interest rates to 4% amid inflation concerns. [online] Available at: https://www.bbc.co.uk/news/business-61799102
[2] The Guardian (2025). Bank of England cuts interest rates to 4% as inflation concerns grow. [online] Available at: https://www.theguardian.com/business/2025/aug/05/bank-of-england-cuts-interest-rates-to-4-as-inflation-concerns-grow
[3] The Telegraph (2025). Bank of England cuts interest rates for third time this year. [online] Available at: https://www.telegraph.co.uk/business/2025/08/05/bank-england-cuts-interest-rates-third-time-year/
[4] City AM (2025). Bank of England cuts interest rates to 4% as it signals end of rate-cutting cycle. [online] Available at: https://www.cityam.com/bank-of-england-cuts-interest-rates-to-4-as-it-signals-end-of-rate-cutting-cycle/
- The Bank of England's cautious approach to future interest rate cuts suggests a careful balance between stimulating the economy and managing inflation, a concern within the realm of politics and finance.
- Analysts from consultancy Pantheon Macroeconomics have highlighted the Bank's focus on inflation, as they predict only one more interest rate cut for the remainder of the year, due to their belief that the BoE is nearing the end of its rate-cutting cycle.
- The BoE's decision to lower rates comes amidst discussions in the business sector regarding the potential impact of food prices increasing due to packaging regulation and extra labor costs imposed via the hike in employers' national insurance contributions, which consequently affects the broader insurance market.
