Bank of England lowers interest rate, prompting public enthusiasm from Rachel Reeves, yet privately she finds little reason for jubilation
The Bank of England's Monetary Policy Committee (MPC) has made a cautious move to ease monetary policy, lowering the Bank Rate by 0.25 percentage points to 4% in a narrow 5–4 vote [1][2]. This decision reflects a split within the committee, with two opposing groups advocating for either interest rate cuts or maintaining the status quo due to ongoing inflation concerns.
On one hand, the majority group believes that recent disinflation trends, slowing wage growth, and the restrictive monetary policy stance over the previous years have created room to reduce rates [1][2]. They argue that it is appropriate to lower rates now to support growth, while still aiming to bring inflation sustainably back to the 2% target over the medium term.
In contrast, a minority group is concerned about inflation, which remains elevated above target (around 3.5% in Q2 2025) due to factors like energy, food, and administered prices [1][2][3]. This group is wary of easing too soon, as inflation risks—especially inflation expectations and global uncertainties—remain significant.
Both groups have valid arguments. The cut reflects confidence that inflation will moderate further and lower rates will support growth, but the close vote and minority dissent highlight ongoing inflation risks and caution to avoid premature easing that could reignite inflation pressures [1][2].
The economy is currently experiencing subdued growth and job losses are mounting [4]. Food price inflation, which is among the most dangerous types of inflation, is expected to hit 4% in September, with food retailers passing on higher national insurance and living wage costs to customers [5][6]. Economists at the Bank have pointed out that food retailers, who employ a large proportion of low-wage workers, are more vulnerable to the lowering of the national insurance threshold [7].
One member of the committee, Alan Taylor, initially suggested a larger half a percentage point cut due to his concerns about the economy [8]. However, five members of the committee believe that interest rates should be cut again due to the stagnating economy and job losses [9]. When food price inflation increases, workers are more likely to push for pay rises, potentially leading to a dangerous loop of higher inflation [10].
The Bank of England had to take the decision on monetary policy to a re-vote for the first time in its history [11]. Households spend 11% of their disposable income on food, meaning higher food price inflation can play an outsized role in overall inflation perception [12]. The Bank has upgraded its inflation forecasts and blames higher utility bills and food prices for the increase [13].
In essence, the Bank of England's policy decision represents a balanced judgment rather than one side being definitively correct. The true test will be how inflation and economic growth evolve in the coming months, which will guide future rate changes [1][2][5].
- The business sector might benefit from the lower interest rates as a result of the MPC's decision, as it could stimulate spending and investment, potentially alleviating the current economic downturn.
- Meanwhile, the ongoing war between the advocates for rate cuts and those concerned about inflation continues, with the financial implications for both business and consumers hanging in the balance, particularly in light of rising food prices.
