The Bank of England is likely to cut interest rates for the fifth time in a year at its upcoming Monetary Policy Committee meeting on Thursday, 7 August. Markets are pricing in a 94% probability of a 25 basis point reduction — and we believe the signals now favour that outcome.
This would bring the Bank Rate to 4.00%, extending an easing cycle that began in August 2024. But while the direction appears set, the case is far from uncontested.
Recent inflation data surprised to the upside. Headline CPI rose to 3.6% in June, with core inflation also increasing to 3.7%. Services inflation — seen as the most reliable gauge of domestic pricing pressure — held steady at 4.7%. The Bank itself forecasts a further near-term rise in inflation to 3.7% by September. These figures will give the MPC’s hawks reason to pause.
But the economy is clearly slowing. Unemployment has risen to 4.7%, its highest level since August 2021. Vacancies have fallen below pre-pandemic levels, payroll growth has stalled, and GDP contracted in both April and May. Real-time indicators suggest slack is building — and with monetary policy acting on a lag, several MPC members believe now is the time to act.
Deputy Governor Dave Ramsden, who voted to cut in June, has cited “material loosening in the labour market” as justification for further easing. He is not alone. Three members backed a cut last time — and at least two others appear persuadable. A 5–4 or 6–3 vote in favour is now the most likely scenario.
Our verdict rests on two signals.
First, the Bank’s new Monetary Policy Report, due alongside Thursday’s decision, is expected to show medium-term inflation falling below 2% under current conditions. That would give the committee its mandate: to act now to avoid an overshoot later.
Second, the tone from Governor Andrew Bailey will matter more than the vote split. A “dovish cut” — one that lowers the rate while stressing a data-driven path ahead — would allow the MPC to manage market expectations while preserving its inflation-fighting credibility.
Financial markets are already positioned for this. Mortgage lenders have begun trimming rates. Sterling has softened. The gilt curve has flattened. A hold on Thursday would surprise investors — and risk a market overreaction.
There are risks in either direction. Cutting too early could entrench inflation. Holding too long could slow recovery. But with inflation expectations stable, wage growth softening, and activity data weakening, the balance now tilts in favour of action.
The likely outcome? A 25bps cut to 4.00% — with guarded language to reinforce the MPC’s “gradual and careful” mantra.
