Bank of England Cuts Key Rate to 4% Amid Economic Weakness and Inflation Concerns

The Bank of England has reduced its key interest rate by 25 basis points to 4%, marking its fifth cut in the past year amid growing concerns over the UK economy. The decision, announced on August 2, 2025, aims to support a slowing economy, with policymakers citing a weak labor market and subdued growth as primary factors [1]. This is the first rate cut since the Bank initiated an aggressive tightening cycle in response to high inflation. The move signals a cautious shift in monetary policy, as the central bank seeks to balance inflation control with growth support.

The rate cut was implemented by a narrow 5-4 vote within the Monetary Policy Committee (MPC), reflecting internal divisions over the appropriateness of the action. Four members, including Megan Greene and Clare Lombardelli, had advocated for maintaining the current rate [2]. The decision underscores the central bank’s growing concern about economic stagnation, even as inflation has cooled from previous double-digit levels.

Inflation remains above the Bank of England’s 2% target and is projected to peak at 4% later in the year. The latest Consumer Price Index (CPI) data rose to 3.6% in June, indicating that while price pressures are easing, they remain a concern [1]. Meanwhile, GDP contracted by 0.1% in May, signaling further economic weakness. Governor Andrew Bailey emphasized that the rate cut was a measured response to these developments, with a commitment to monitoring inflation risks while supporting growth.

Analysts have anticipated further easing in the months ahead. Jack Meaning of Barclays forecasted a 0.5 percentage point reduction by February 2026, which would bring the rate down to 3.5% [1]. The market reaction to the cut was mixed: the British pound strengthened against the dollar, while the FTSE 100 declined by 0.7%. Two-year gilt yields also edged higher following the announcement [3].

The Bank of England’s rate cut highlights its ongoing challenge of navigating between inflation control and economic stimulus. With a fragile jobs market and weak GDP growth, the central bank has adopted a more accommodative stance. The narrow MPC vote reflects ongoing debate over the pace of policy adjustment, with some members emphasizing inflation risks and others pushing for stronger support.

The central bank has indicated that future decisions will depend on the evolution of inflation and the strength of any potential economic recovery. While the path of monetary policy remains uncertain, the BoE has signaled a willingness to cut rates further if necessary, as it continues to adapt to shifting economic conditions.

Sources:

[1] https://www.cnbc.com/2025/08/07/bank-of-england-cuts-interest-rates-by-a-quarter-point-to-4percent.html

[2] https://www.marketscreener.com/news/bank-of-england-lifts-gdp-forecast-as-votes-5-4-to-cut-rates-ce7c5edfdd8bf422

[3] https://www.reuters.com/world/uk/divided-bank-england-cuts-rates-pound-jumps-2025-08-07/