Bank of England cuts interest rates in historic vote
The Bank of England has cut interest rates to four per cent in an unprecedented double vote as Monetary Policy Committee members clashed on the impacts of a crumbling jobs market and higher food prices.
Monetary Policy Committee (MPC) members were told to vote a second time after four members voting for a 25 basis point cut were matched up by another four members opting for interest rates to be held.
The remaining policymaker – external member Alan Taylor – voted for a 50 basis point cut, prompting Governor Andrew Bailey to call a second vote for the first time in the Bank’s history.
Taylor changed his initial vote to back a 25 basis point cut, joining Bailey, Sarah Breeden, Dave Ramsden and Swati Dhingra.
The members to vote for interest rates to be held were Megan Greene, Clare Lombardelli, Catherine Mann and Huw Pill, who previously called for the Bank’s interest rate-cutting cycle to slow down.
“We have cut interest rates today, but it was a finely balanced decision,” Bailey said.
“Interest rates are still on a downward path, but any future rate cuts will need to be made gradually and carefully.”
Chancellor Rachel Reeves said: “This fifth interest rate cut since the election is welcome news, helping bring down the cost of mortgages and loans for families and businesses.
“The stability we have brought to the public finances through our plan for change has helped make this possible and helped us become the fastest growing economy in the G7 in the first quarter of this year.
“We’re locking in this growth in the long run by investing over £113 billion in infrastructure, securing three major trade deals and embracing the technologies of the future – to drive up wages and improve living standards across the UK.”
Inflation edged up to 3.6 per cent in the year to June, with the Bank expecting it to hit four per cent in September.
Bank members pointed to worries over energy markets raising costs as well as higher food prices for consumers, driven in part by “supply issues” and extra costs loaded onto firms by Rachel Reeves’ £20bn tax raid on employers.
Red tape on packaging waste due to hit businesses in October could also drive up prices by as much as 0.5 percentage points, forecasters claimed.
Food price inflation could rise to around 5.5 per cent by the end of the year given firms were raising prices ahead of the scheme’s introduction.
Forecasts also said the Bank would only hit its two per cent inflation target in 2027 while UK growth predictions were 1.2 per cent for this year and 1.3 per cent next year.
Unemployment could hit five per cent by the middle of 2026, economists added.
Split vote on interest rates
MPC members who voted for interest rates to be held pointed to the worries of “second-round effects” kicking in, where high wage growth could lead to prices rising higher.
Policymakers were also more “sensitive” to inflation being higher than expected given the risks of Brits setting higher prices.
But Taylor suggested that trade diversion due to President Trump’s tariffs and a deterioration in the jobs market, shown by a rise in the unemployment rate to 4.7 per cent, would slow down price growth.
Minutes to the Bank’s meeting said he justified his 50 basis point cut partly on the basis of an “increased risk of a recession” in the UK.
Bank officials also appeared to take aim at the Labour government as the its latest monetary policy report claimed “tightening” fiscal policy based on March’s Spring Statement could weigh down on GDP growth.
Labour costs imposed on firms could have hit output and create “more sudden adverse developments” on the jobs market, while trade deals struck by the government have not undone the negative impacts to growth.
The only other time when the vote were tied 4-4 was in March 1998 when the MPC was short of one member.
Former Bank of England Governor Mervyn King then made the final decision on interest rates.