The Bank of England cut interest rates by 25 basis points to 4.0% in a narrow 5–4 vote. Governor Andrew Bailey called it a “finely balanced decision,” emphasizing that future cuts will be gradual and cautious.
Bailey and four others backed the cut, while four MPC members favored holding steady. One voter, Alan Taylor, preferred a deeper 50 bp cut but supported the quarter-point move.
This is the third cut since the base rate peaked at 5.25% in August 2024.
Inflation is expected to peak again at 4.0% in September, with some risk of renewed wage-price pressures. However, GDP growth remains subdued and labor market slack is emerging.
What the Cut Means for the Economy and Markets
Susannah Streeter, head of money and markets, Hargreaves Lansdown, told CCN: “Bank of England policymakers are still playing a highly cautious hand. Although the Bank has opted for a cut, the chances of another reduction by the end of the year have receded sharply.”
The Monetary Policy Committee is split five to four between cut and hold, so it’s pointing to a very prudent approach ahead, according to the expert.
“Amid trade turmoil, wary business sentiment and rising unemployment, the UK economy is going in the wrong direction, and the Bank of England wants to give it a chance to get back on track,” she added.
But in the background, the kettle of rising prices is still whistling. Inflation remains unhelpfully high and is expected to hit peak obstinacy of 4% in September – double the bank’s target.
“Consumers are continuing to show resilience in spending patterns in parts of the economy, and the worry will be that employers will keep paying inflation-busting wages, which could fuel prices further”, Streeter said.
“So even though we’ve had a cut today, borrowers will need to find big reserves of patience and may have to wait until next year to see costs fall back significantly.”
“It means the boost to growth Chancellor Rachel Reeves needs to help bolster the public finances and ease the squeeze on spending looks set to stay elusive, which is why tax rises in the Budget look set to be on the cards.’”
Inflation Remains Stubborn
CPI rose 3.6% in the year to June, up from 3.4% in May and above forecasts. This makes it the highest inflation rate among G7 countries, supporting the BoE’s cautious approach to cuts.
Food prices were the main driver—especially sugar, jam, and chocolate (up 17.7% due to poor cocoa harvests)—along with transport costs.
Lower airfares and petrol prices offset the spike. Despite the spike, forecasts still suggest inflation could ease toward 2% by early 2026.
Services inflation stayed at 4.7%, disappointing hopes for a decline. ING noted that much of this is driven by regulated or lagging factors, such as April’s road tax rise and rent increases, both of which are expected to ease in the coming months.
The Bank of England will be watching employment data closely. If job numbers disappoint, it could be forced into rate cuts—just as inflation is projected to fall.
BoE Predicts the Increase Will Be Temporary
Steve Clayton, head of equity funds, Hargreaves Lansdown, told CCN: “With the corporate interim results season yet to kick off in earnest, today was always going to see investors turning their attention to economic news, and inflation release gives them good reason to do so.”
The Office for National Statistics highlighted fuel prices as the main driver of the increase.
“Fuel prices are actually going down, but not as quickly as they were a year ago, which means that increases elsewhere are felt more acutely in the overall figure,” Clayton said.
“Services pricing remains stubbornly strong too, with the pace of service price inflation sticking at 4.7%.”
“So far, the BankofEngland has held to the view that rising unemployment will drag inflation back down later in the year. But traders will fret that cutting rates while prices are accelerating may be asking too much of the Bank’s confidence in its own predictions,” the expert added.
Goldman’s Expectations for the U.K. Economy
One of the primary reasons for Goldman Sachs’ revised outlook is the expectation of a cooling in U.K. wage growth in the coming months. This suggests that inflationary pressures may ease sooner than anticipated. It would allow the Bank of England to adopt a more accommodative monetary policy.
Goldman Sachs has revised its outlook for U.K. services inflation, anticipating a significant deceleration in the coming months. This key factor could enable the Bank of England to achieve its target of 2.0% inflation.
The investment bank expects services inflation to fall 5.0% by December, 0.3% below the BoE’s August forecast. Goldman Sachs further predicts that services inflation will continue to decline, reaching 3.8% by the end of 2025.
Stehn noted that progress in reducing underlying services inflation, excluding rent and education, will likely reassure the MPC that price pressures are easing.
Additionally, Goldman Sachs’ calculations suggest that the U.K.’s terminal interest rate, the level at which interest rates are deemed appropriate, is lower than in other comparable economies. This indicates that the BoE has more work to do regarding interest rate cuts.
The investment bank has assigned a 40% probability to its updated baseline expectation, a 30% probability to quarterly rate cuts, and a 20% probability to a more aggressive cutting cycle with 50 basis point increments.
A Historical Glimpse At U.K. Interest Rates
A review of the Bank of England’s interest rate history reveals a significant shift in approach beginning in February 2008. The global financial crisis prompted this shift, which originated in the U.S. with the housing market bubble in 2007 but subsequently impacted the U.K. economy.
Throughout 2008, the BoE implemented five rate cuts, reducing the rate from 5.25% in February to 2% in December.
This 2% rate marked the lowest level since the banking crises of the 1880s and 1890s, as reported by the International Monetary Fund (IMF).
It was also the lowest level since the Great Depression and World War II in the BoE’s interest rate history.
U.K. interest rates increased notably after the pandemic ended. Source: BOE data.
In 2020, the BoE made two rapid interest rate cuts on March 11 and 19. These moves drove the U.K. interest rates to an unprecedented low of 0.1%. This sharp reduction mirrored the emergency measures other central banks and governments worldwide adopted to bolster their economies during the COVID-19 pandemic.
The Post-Pandemic Interest Rate Adjustment
The near-zero interest rate remained in effect until December 2021, as the U.K. and other nations gradually reopened their economies. As the recovery gathered steam and inflation surged in tandem, the BoE increased the bank rate from 0.1% to 0.25% on Dec. 16, 2021.
This marked the U.K. as the world’s first leading economy to raise interest rates following the pandemic.
With the economy rebounding and commodity and energy prices soaring due to Russia’s invasion of Ukraine in February 2022, the BoE implemented eight rate hikes throughout 2022. By year-end, the bank rate had reached 3.5%.
In 2023, the U.K. Central Bank continued its tightening policy. It raised rates by 50 basis points (bps) to 4% in February. A 0.25% increase to 4.25% followed in March. And an additional 25 bps hike occurred in May, pushing the rate to 4.5%.
Assessing the Peak of U.K. Inflation in 2022
Inflation is pivotal in shaping the U.K.’s key interest rate in the short to medium term.
In 2022, U.K. inflation accelerated, with the consumer price index (CPI) reaching 11.1% in October. Although it temporarily receded towards the end of the year, a surprise uptick to 10.4% in February occurred. Rising food and non-alcoholic drink costs have driven the increase. Subsequently, inflation eased to 10.1% in March.
Inflation, economic growth, and labor market conditions will shape the Bank of England’s interest rate decisions in the coming years.
U.K. Interest Rate Projections For the Next 5 Years
Given the substantial increase in the Bank Rate at the onset of this tightening cycle, the current monetary policy stance is restrictive. The outlook for GDP anticipates a period of relatively stagnant growth during the first half of the forecast period. Furthermore, growth will remain well below historical averages in the medium term. This is partly due to diminishing fiscal stimulus and subdued potential supply growth.
The BOE said, “Compared to our assessment in August, the GDP forecast has been revised downward to account for recent data indicating weaker-than-expected economic activity.”
Tcommitteetee also decided to reduce the magnitude of the previous demand-boosting judgment in this forecast. However, the BoE said it was not entirely out of discussion.
In recent quarters, excess demand in the U.K. economy has decreased. Now, analysts expect a gradual increase in economic slack from the beginning of the next year. Unemployment will rise throughout the forecast period. It may exceed the committee’s revised medium-term equilibrium estimate by the end of the year.
The Bank said, “Additionally, uncertainties have arisen concerning the ONS’s official labor market activity data, primarily based on the Labour Force Survey. Therefore, the committee continues to weigh insights from a variety of indicators.”
Following the latest U.K. main economic indicators, the BoE expects an interest rate of 5.3% by the end of 2023. It also expects a rate of 5.1% for 2024, 4.5% for 2025, and 4.2% for 2026.
Impact Of Interest Rates On Cryptocurrency
Cryptocurrencies, including Bitcoin (BTC), have exhibited remarkable resilience despite rising interest rates. Notably, Bitcoin saw impressive growth, surging by 2,000% during the years 2015 and 2016, when interest rates notably increased.
However, elevated interest rates can have various effects on the cryptocurrency market. Persistently high inflation, rising gas prices, and increased energy costs due to higher interest rates may dampen risk appetite. According to some experts, they also pose challenges for cryptocurrencies.
Central Banks Influence On Cryptocurrencies
Central Banks play a pivotal role in shaping economic conditions by directly impacting money circulation and financial market stability.
Their ability to adjust interest rates directly affects borrowing rates for financial and banking institutions. Major central banks like the Fed, ECB, and BoE have opted for interest rate hikes in response to widespread inflation.
It is worth noting the increasingly intertwined relationship between cryptocurrencies and these macroeconomic and monetary shifts. The decisions to increase interest rates, particularly by the Fed, have immediate consequences for the cryptocurrency markets.
In simpler terms, the Fed’s more assertive stance has cast uncertainty over cryptocurrencies. It influences market sentiment as tighter monetary policies have become necessary.
Most central banks have raised interest rates, with a few exceptions. Simultaneously, Bitcoin’s value declined over the past year, highlighting the interaction between central bank actions and cryptocurrency markets.
Giuseppe Ciccomascolo began his career as an investigative journalist in Italy, where he contributed to both local and national newspapers, focusing on various financial sectors.
Upon relocating to London, he worked as an analyst for Fitch's CapitalStructure and later as a Senior Reporter for Alliance News. In 2017, Giuseppe transitioned to covering cryptocurrency-related news, producing documentaries and articles on Bitcoin and other emerging digital currencies. He also played a pivotal role in establishing the academy for a cryptocurrency exchange website. Crypto remained his primary area of interest throughout his tenure as a writer for ThirdFloor.
