Bank of England cuts interest rates by 25 basis points to 5%

The Bank of England cut interest rates by 25 basis points to 5% on Thursday, in line with forecasts, after British consumer price inflation returned to the BoE’s 2% target in May and stayed there in June, down from a multi-decade high of 11.1% hit in October 2022

Lowering interest rate from a 16-year high came after MPC’s narrow 5-4 vote in favor of rate cut, as policymakers remain divided over whether inflation pressures had eased sufficiently to start easing monetary policy.

Governor Andrew Bailey said the BoE’s Monetary Policy Committee would move cautiously going forward and need to make sure inflation stays low.

He also said that policymakers need a balanced approach not to cut interest rates too quickly or by too much.

Markets showed limited reaction to BOE’s decision, but overall sentiment starts to improve on eventual start of policy easing (the first rate cut since March 2020), after rates have been on hold for almost a year, which shifts focus from inflation worries.

Current level of British inflation is lower than in the euro zone, where the European Central Bank cut rates in June, and the United States, where on Wednesday the Federal Reserve kept interest rates steady but opened the door to a September cut.

On the other hand, the BoE expects headline inflation to rise to 2.75% in Q4 as the effect of last year’s steep falls in energy prices fades, before returning to its 2% target in early 2026 and later easing below the target level.