Bank of England Cuts Interest Rate to 4% Amidst Inflation Fears

The Bank of England (BoE) on Thursday lowered its benchmark interest rate by 0.25 percentage points to 4.0%, the lowest level in two and a half years, in a move aimed at supporting the UK economy amid continued uncertainty surrounding US trade tariffs.

The quarter-point cut, which was widely expected, marks the BoE’s fifth rate reduction since beginning a monetary easing cycle in August 2024. The decision comes as the central bank slightly upgraded its 2025 economic growth forecast for the UK to 1.25%, up from an earlier estimate of 1.0%.

“The direct impact of US tariffs is milder than feared, but more general tariff-related uncertainty still weighs on sentiment,” the BoE noted in a statement, citing data gathered from UK businesses.

Thursday’s rate decision followed a rare and dramatic moment in the BoE’s policy-setting process. For the first time since the Bank gained independence in 1997, a second vote had to be held after an initial deadlock among the nine-member Monetary Policy Committee.

In the initial vote, four members supported the rate cut, four voted to keep rates unchanged, and one member proposed a steeper 0.50 percentage point cut. That member later revised their position in favour of the 0.25-point reduction, breaking the tie and allowing the motion to pass by a narrow 5–4 margin.

“Interest rates are still on a downward path, but any future rate cuts will need to be made gradually and carefully,” said BoE Governor Andrew Bailey.

Inflation Fears

The updated guidance from the BoE suggests that interest rates may stabilize around 4% for now, with expectations for a decline to 3.5% within the next year a slight upward revision from previous projections. The prospect of sustained rates gave a boost to the British pound.

The BoE’s primary mandate is to maintain annual inflation at 2%. However, the Consumer Prices Index (CPI) unexpectedly rose to 3.6% in June an 18-month high driven by elevated motor fuel and food prices. The Bank now anticipates inflation to peak at 4% in the coming month before gradually easing.