The Bank of England has cut its main interest rate to 4 percent, the lowest level since March 2023, in a closely contested decision that signals a fresh phase for UK monetary policy — but also fresh concerns about the durability of inflation.
Meeting on 6 August, the Monetary Policy Committee (MPC) voted by a narrow 5–4 margin to reduce Bank Rate by 0.25 percentage points, with several members urging caution due to ongoing inflation risks. The decision came after an unprecedented second round of voting — the first time the MPC has done so in its nearly 30 year history.
The move, the Bank’s fifth consecutive cut since last August, marks a deliberate but carefully staged easing cycle. The Bank stressed that further reductions would not follow a preset course.
In its quarterly Monetary Policy Report released today, the Bank projected headline consumer price inflation would rise to 4.0 percent in September before slowly returning to target. Significantly, inflation is now expected to remain above the 2 percent target for nearly two more years, only reaching it in the second quarter of 2027 — a timeline later than previously forecast.
The MPC described its approach as “gradual and careful,” reiterating that policy is not on a preset path and further reductions will depend on incoming evidence. The Committee stated: “A gradual and careful approach to the further withdrawal of monetary policy restraint remains appropriate. The restrictiveness of monetary policy has fallen as Bank Rate has been reduced. The timing and pace of future reductions… will depend on the extent to which underlying disinflationary pressures continue to ease. Monetary policy is not on a pre-set path, and the Committee will remain responsive to the accumulation of evidence.”
While wage growth has slowed, pay pressures remain high, and services inflation — a particular concern for the MPC — has yet to meaningfully subside. The Bank noted a growing risk that inflation expectations could become embedded if the current spike persists.
UK GDP growth remains subdued, with the Bank estimating that a margin of economic slack has now opened up. The unemployment rate is forecast to edge up toward 5 percent by mid-2026, while household consumption growth is expected to lag historical norms.
The Bank also confirmed that the restrictive effect of previous rate hikes is likely peaking now, but the pass-through to households is not yet complete, with many mortgage holders facing higher payments as they remortgage in the coming year.
For a deep dive on the drivers behind the Bank’s decision, see Business Quarter Executive’s recent analysis.
Bottom line —
- Bank Rate now stands at 4 percent, with further moves to be data dependent
- Inflation to remain above target until Q2 2027
- Policy remains “restrictive” even after the cut
- Executive teams should review debt, pricing, and cost assumptions for a slower return to normal conditions
