The Bank of England Takes the Lead in Cutting Interest Rates by 25 Basis Points, Market Interprets as Possible Pause in Rate Cut Cycle
On August 7, the Bank of England announced a reduction in the benchmark interest rate from 4.25% to 4%, marking the fifth rate cut since August 2024, in line with market expectations.
However, behind this seemingly routine monetary policy adjustment lies a profound division among central bank members. For the first time in history, the Bank of England conducted two rounds of voting to reach a decision due to difficulty in unifying opinions.
In the first round of voting, the committee experienced a rare tie of 4:4:1. External MPC member Alan Taylor advocated for a more aggressive 50 basis point cut;
four members, including MPC Deputy Governor Clare Lombardelli and Chief Economist Huw Pill, insisted on maintaining the rate at 4.25%; while the remaining four members, including Governor Andrew Bailey, supported the decision to cut by 25 basis points to 4%.
After the second round of voting, the decision to cut rates was ultimately passed with a narrow margin of 5-4, demonstrating the central bank's difficult balancing act between addressing economic slowdown and inflationary pressures.
It is noteworthy that the Bank of England removed the previous wording of "the policy remains restrictive" from its policy statement, instead stating, "with the rate cut, the restrictiveness of monetary policy has decreased."
This change has also been interpreted by the market as a signal that the central bank may soon pause its rate cut cycle, directly tearing up the check that Chancellor of the Exchequer Rachel Reeves and Prime Minister Keir Starmer hoped to use for economic stimulus through easing.
Meanwhile, the UK economy has shown a declining trend for two consecutive months, with the unemployment rate rising to 4.7%, a four-year high. Inflation stands at 3.6%, far exceeding the 2% target, and is predicted to rise to 4% in September. Worse still, the central bank expects inflation to return to normal levels only by the second quarter of 2027, which is three months later than previously estimated.
Market reactions have been relatively muted, with the GBP/USD exchange rate showing limited volatility after the decision was announced, reflecting that investors have fully digested the expectations for a rate cut. Analysts point out that the future policy path will heavily depend on data performance, particularly inflation trends and changes in the labor market.
Most institutions expect that if the economy remains weak, the Bank of England may cut rates again in November, but the room for rate cuts in 2026 may be limited to only 1-2 times, with the final rate potentially maintaining approximately 3.25%