The Bank of England voted 5–4 to cut the Bank Rate by 25 basis points to 4.25% in May, as widely anticipated by markets. The narrow split vote revealed diverging views within the Monetary Policy Committee (MPC): two members favored a larger 50bps cut to 4.0% amid signs of rapidly easing inflation and deteriorating growth momentum, while two others preferred to hold the rate at 4.5%, citing concerns over persistently elevated wage pressures and core inflation.
Bank of England cuts rates by 25 bps to 4.25%
The decision reflects the central bank’s efforts to balance growing disinflationary signals with residual upside risks to price stability.
The Bank highlighted that the UK economy has continued to decelerate since mid-2024, with GDP growth losing steam and the labour market showing clearer signs of loosening. Job vacancies have declined, hiring intentions have softened, and the unemployment rate has edged higher, suggesting that the period of exceptionally tight labour market conditions may be easing. At the same time, headline CPI inflation fell to 2.6% in March, down from double-digit levels seen in 2022, and edging closer to the BoE’s 2% target. However, policymakers acknowledged that inflation could temporarily rebound to around 3.5% in Q3 due to base effects from last year's energy price spike before resuming its downward trajectory.
Wage growth slowly moderated
Wage growth, while still elevated, has shown early signs of moderating, and the Bank expects a more pronounced slowdown in pay dynamics over the second half of the year. Inflation expectations, both in market-based measures and household surveys, remain anchored, indicating rising confidence in the central bank’s ability to control future price pressures.
Externally, the global backdrop has become more challenging. President Trump’s recent rollout of sweeping tariffs has increased geopolitical and economic uncertainty, weighed on global trade, and dampened business sentiment. These developments have led to a broad reassessment of interest rate expectations worldwide, with markets now pricing in more aggressive policy easing from central banks in the second half of 2025.
What to expect
Looking ahead, the MPC reiterated its commitment to bringing inflation back to the 2% target in a sustainable manner. While the current cut marks the beginning of what many expect to be a cautious easing cycle, policymakers stressed that any further reductions in the Bank Rate would be contingent upon incoming data. The Committee emphasized that risks remain tilted in both directions, warranting a flexible, data-dependent approach. With inflationary risks still present, particularly in the services sector, the path to further policy normalization will likely be gradual, aimed at avoiding a premature easing that could reignite price pressures or unsettle market expectations.
