Bank of England to Cut Rates to 4% Amid Economic Slowdown and Rising Unemployment

The Bank of England is preparing to implement its fifth consecutive 25 basis point rate cut, bringing the key interest rate down to 4%—the lowest level in over two years. This move is expected to be announced during the central bank’s meeting on a Thursday, with a press conference to follow [1]. The decision reflects a broader easing trend in monetary policy, aimed at supporting a slowing economy and a strained labor market. The UK’s unemployment rate has reached a four-year high, with over 180,000 jobs lost since April’s tax and minimum wage policy changes [2].

The inflationary pressures, which spiked to 3.6% in June—higher than the BoE’s 3.4% forecast—have become a focal point for policymakers. The increase, driven by surging energy and food prices, marks the highest inflation level in 17 months. While Governor Andrew Bailey has described the inflationary spike as temporary, other members of the Monetary Policy Committee (MPC), including Chief Economist Huw Pill, have raised concerns about potential second-round effects feeding into wage growth and core inflation [3].

Market expectations are largely aligned with the anticipated cut, with London’s financial markets already reflecting the move. Investors are also keeping a close eye on forward guidance, as the central bank navigates a tight path between supporting growth and maintaining price stability. A Bloomberg survey indicates the MPC may be divided, with most favoring a 25 basis point reduction, while some members advocate for a larger cut or no change at all [4].

Beyond the immediate rate decision, the BoE is also reconsidering its bond sales strategy in response to rising long-dated gilt yields. Quantitative tightening (QT) has already reduced bond holdings by about £100 billion annually, but market strains—particularly in long-dated gilts—have led to speculation about a potential pivot toward shorter-term debt or a slower pace of sales [5]. Governor Bailey has highlighted concerns over 30-year gilt yields reaching levels last seen in the late 1990s, suggesting the BoE may adjust its strategy ahead of its September update [6].

Analysts suggest that the central bank’s next move will likely be a “hawkish cut,” signaling a continued but cautious approach to easing. While the current cut is mostly priced in, markets expect one more reduction this year, likely in November, bringing the rate down to around 3.5% by 2026 [7]. The outcome of the BoE’s decision is expected to have broader implications, not only for the UK’s economic recovery but also for global financial markets.

The challenge ahead lies in balancing inflation control with growth support, as the UK economy contends with both domestic and global uncertainties. With the BoE’s next steps under close scrutiny, the path of monetary policy will remain a key indicator for investors and policymakers alike.

Sources:

[1] https://www.mitrade.com/au/insights/news/live-news/article-3-1018419-20250807

[2] https://www.becclesandbungayjournal.co.uk/news/national/25370182.bank-england-ready-cut-interest-rates-jobs-market-slows-experts-say/

[3] https://www.bloomberg.com/news/articles/2025-08-06/bank-of-england-set-to-cut-rates-to-two-year-low-decision-guide

[4] https://www.fidelity.co.uk/shares/stock-market-news/market-reports/

[5] https://www.monexcanada.com/fx-market-insights/market-news-and-analysis/

[6] https://www.juliusbaer.com/en/insights/market-insights/cio-views/cio-views-the-trade-war-that-will-not-happen/