In a step that was widely expected, the Bank of England announced on August 7 a reduction in the main interest rate from 4.25% to 4%, marking the fifth cut since August 2024. Although the decision fell within market expectations, what transpired behind the scenes revealed an unprecedented division among monetary policymakers.
For the first time in its history, the bank was forced to conduct two consecutive votes to reach a final decision, after members of the Monetary Policy Committee failed to reach a consensus. The first round resulted in a unique balance: one vote called for a 50 basis point cut, four votes supported keeping rates steady, and four others backed a 25 basis point cut.
In the crucial vote, the decision was made by a narrow majority of 5 to 4, highlighting the challenges facing monetary policy amid economic slowdown on one hand, and inflationary pressures on the other.
The accompanying statements to the decision also carried precise signals regarding the bank's directions. The phrase that confirmed the policy as 'still constrained' was removed and replaced with a phrase suggesting a relative easing in monetary tightening, which investors interpreted as an indicator of a potential temporary suspension of the easing cycle.
This shift comes at a time when the British government is facing pressure to adopt a more stimulative fiscal policy, which contrasts with the recent signals from the Bank of England. Hopes from Treasury Secretary Rachel Reeves and Prime Minister Keir Starmer to boost the economy through flexible monetary policy have faded after this shift in the bank's tone.
Recent economic data have increased the complexity of the situation: growth has declined for the second consecutive month, with the unemployment rate reaching 4.7% – the highest in four years – alongside inflation rising to 3.6%, with expectations of it reaching 4% in September. Worse yet, the bank expects inflation to return to the target level of 2% only by the second quarter of 2027, three months later than its previous estimates.
The market's reaction was muted, as the British pound did not witness significant movements against the dollar following the decision, indicating that the step was expected and priced in beforehand.
Analysts believe that the path of monetary policy in the upcoming phase will heavily depend on economic indicators, particularly inflation levels and labor market performance. If signs of economic weakness persist, the Bank of England may consider an additional rate cut in November, although most estimates indicate that the pace of easing may slow starting from 2026, with the possibility of only one or two cuts and stabilizing rates between 3.25% and 3.5%.
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