The Bank of England cut interest rates on Thursday after a narrow vote by policymakers but it signalled that the already gradual pace of lowering borrowing costs might slow further. After a big drop in inflation and a new forecast from BoE staff that the economy is stagnating, five Monetary Policy Committee members voted to lower the BoE’s benchmark rate for the sixth time since August 2024 to 3.75% from 4%.
The four other members supported no change as they worried about the potential for inflation – still the highest among the Group of Seven economies – to remain too high. Analysts polled by Reuters last week had mostly expected a 5-4 vote for a rate reduction as Britain’s economy struggles to grow and inflation falls. Governor Andrew Bailey changed his view and voted for a cut as he sees inflation returning close to the BoE’s 2% target as soon as April or May next year, about a year earlier than forecast by the central bank just last month. But he cautioned that inflation still posed some risks. “The calls will become closer, and I would expect the pace of cuts, therefore, to ease off at some point,” he told broadcasters. “But I’m not going to judge exactly when that is, because it’s too uncertain at the moment.”
Sterling strengthened by as much as a cent against the U.S. dollar after the decision, before paring gains. Interest-rate-sensitive two-year gilt yields – which were at their lowest since August 2024 before the decision was announced – rose as much as 6 basis points as investors saw slightly less chance of more than one rate cut next year.
