The Bank of England (BoE) is widely expected to lower interest rates at its meeting this week, marking the fifth cut since last August. However, while a 0.25% cut is all but certain, the Monetary Policy Committee (MPC) is not expected to accelerate the pace of easing, leaving the future trajectory of monetary policy in the balance.
City traders are pricing in an 80% probability that the nine-member committee will reduce the Bank Rate from 4.25% to 4% on Thursday, returning borrowing costs to levels last seen in March 2023.
“A rate cut is never nailed on, but it’s looking very likely we’ll see one when the Bank of England meet next Thursday,” said Sarah Coles, personal finance columnist at Yahoo Finance UK and head of personal finance at Hargreaves Lansdown.
Financial markets have anticipated the move for some time, and they have also factored in at least one more cut this year, likely in November.
Yet with inflation still running well above the Bank’s 2% target and signs of labour market weakness emerging, the debate inside the MPC is likely to be contentious.
“To cut, or not to cut, is not the question facing the Bank of England interest rate committee. At least, that’s what the markets are saying,” said Laith Khalaf, head of investment analysis at AJ Bell.
“They have already almost fully priced in an interest rate cut this week, so focus will lie not so much on the decision itself as on the precise split of the votes from the interest rate committee, and on the forecasts for inflation and growth in the accompanying economic report,” he added.
“Of course, if the Bank of England chooses not to cut rates, there will be a sizeable backlash in the bond markets. But that seems unlikely on this occasion.”
Khalaf highlighted that at the MPC’s last meeting in June, three members already backed a cut to 4%. With economic data weakening since, including a softening labour market and rising unemployment, momentum appears to have tilted further toward easing.
“The unemployment rate has risen to its highest level since the pandemic, and wage growth continues to cool. No doubt one of the factors behind a weaker labour market is the national insurance hike announced by the chancellor in last year’s budget, which came into force in April,” he said.
Khalaf also pointed to the Bank’s measured approach to cutting, calling the current cycle “metronomic” in nature.
“The Bank of England has been metronomic in its activity during this rate-cutting cycle, with base rate getting chopped back every three months since last August. This fits in with the ‘gradual and careful’ narrative expounded by the Bank. One year on from that first rate cut, the steady drum beat of the rate-cutting cycle demands another thump.”
Looking ahead, markets expect the rate to fall to 3.5% by spring 2026, with further cuts potentially in November and February.
“If it plays out this way, it would surely go down as the tidiest rate-cutting cycle on record, especially in light of what’s going on in the world outside of Threadneedle Street,” Khalaf said. “However, there are plenty of things which could throw the schedule off course… The effects of tariffs on the global economy, the unpredictable prospects for energy prices, and a tricky autumn budget in the UK are just three factors which will weigh on the direction of interest rates from here.”
“It might seem odd for the Bank of England to be cutting interest rates at the same time that inflation is pulling away from the 2% target,” Khalaf said. “However, the Bank’s actions are based not on the current inflation rate, which tells us about price rises over the last 12 months, but rather on future inflation, forecast over the next three years.”
“Importantly, the Bank of England’s previous forecasts show inflation rising over the course of this year before falling back, so prices are currently evolving broadly in line with what the Bank has been expecting.”
While a cut appears to be the consensus, the vote is likely to be split. The MPC is expected to reiterate its “gradual and careful” stance, keeping the door open for future moves, but resisting pressure to commit to a faster pace of easing.
More dovish members, such as external appointees Alan Taylor and Swati Dhingra, could support a deeper reduction amid concerns over rising joblessness. The unemployment rate rose to 4.7% in the three months to May — the highest since June 2021 — and vacancies have slipped below pre-pandemic levels.
Others are expected to remain cautious. “Signs of lingering price pressures will mean the committee remains cautious, with two of the hawkish MPC members expected to favour no change,” said Matt Swannell, chief economic adviser to the EY Item Club.
Attention will also focus on Catherine Mann, one of the MPC’s most outspoken members. In February, she pushed for a 50 basis point cut, while voting against the consensus again in May to keep rates on hold.
The expected split “reflects the MPC’s ‘finely balanced decision” on cutting rates to 4%,” said Deutsche Bank’s Sanjay Raja. He warned that hawkish voices within the committee could ultimately slow the pace of cuts.
Raja expects three cuts over the coming 12 months, broadly in line with market expectations for rates to settle around 3.5%.
Michael Saunders, senior economic advisor at Oxford Economics and former MPC member, struck a more cautious note. “The economy is likely to face persistent headwinds,” he wrote.
“Monetary policy remains quite tight. Fiscal policy is tightening, and the budget may include further tax hikes later this year. Trade policy uncertainty remains high, deterring investment and hiring. The resultant disinflationary effects for the UK may be reinforced by trade diversion from China.”
“As a result,” Saunders added, “the MPC are likely to cut rates again later this year and early next year, with Bank Rate falling to 3.25% by mid-2026, somewhat below market pricing. Rates could fall faster and/or further if the economy weakens sharply.”
The Bank of England is widely expected to lower interest rates at its meeting this week. ·ZUMA Press, ZUMA Press, Inc.
The BoE’s updated economic forecasts, due alongside Thursday’s decision, are expected to be bleak. The economy contracted in April and May, while CPI inflation remains high. Some economists warn that a period of stagflation — characterised by high inflation, stagnating economic growth, and high unemployment — may be setting in.
Robert Wood and Elliott Jordan-Doak from Pantheon Macroeconomics suggest that the anticipated rate cut this week could be the last for the foreseeable future. They point out that solid economic growth, along with ongoing wage and price inflation, limits the case for additional cuts.
Furthermore, they argue that persistent inflation expectations warrant keeping the neutral rate elevated. As a result, they believe the MPC is likely to pause after this cut, particularly given the prolonged period of inflation overshooting.
Enrique Diaz-Alvarez, chief economist at financial services firm Ebury, said: “While we think that a 25 basis points rate cut remains highly likely in August, fears over the latter could ensure no more than a gradual pace of rate reductions beyond then.”
Should the MPC proceed with a cut, savers are likely to see falling returns, particularly on easy-access accounts.
“A cut next week is likely to mean savings rates fall, particularly easy access rates given they can be more sensitive to base rate cuts,” said Mark Hicks, head of active savings at Hargreaves Lansdown.
“At the moment, unusually, the most competitive fixed terms currently have lower headline rates than the most competitive easy-access deals… We think easy-access rates could fall towards 4%. Fixed-rate deals, however, could remain relatively stable, eventually offering higher rates than easy-access products.”
“It means anyone who has money they don’t need for a fixed period of a few months or longer could consider tying it up for a better rate in the longer term.”
On mortgages, Khalaf said that fixed-rate mortgage borrowers are unlikely to see major changes from this week’s decision. “A rate cut also won’t result in a huge change in fixed rate mortgages, seeing as it is already baked into market prices… A shock decision to leave rates on hold would push mortgage rates up though, as the market reacts to a more hawkish position from the central bank.”
Download the Yahoo Finance app, available for Apple and Android.
