Bank of England expected to cut interest rates to 4% amid weakening UK economy

The Bank of England is widely expected to reduce interest rates to 4% today, marking its fifth rate cut in a year, as the central bank responds to signs of a slowing UK economy despite a recent uptick in inflation.

The anticipated quarter-point cut, from 4.25% to 4%, would continue the Bank’s gradual unwinding of monetary tightening after borrowing costs peaked at 5.25% in August 2024. The decision will be announced at midday following a vote by the Bank’s Monetary Policy Committee (MPC).

The vote is expected to be close, with a predicted 5-4 split among the nine-member panel. Governor Andrew Bailey is expected to side with a majority in favour of a modest rate cut, alongside most internal committee members.

Two external members, Swati Dhingra and Alan Taylor, are thought likely to vote for a larger 0.5 percentage point cut, citing deepening economic fragility. However, Huw Pill, the Bank’s chief economist, and Catherine Mann may push for holding rates at 4.25%, concerned by the recent rise in inflation.

The rate cut is expected despite UK inflation rising to 3.6% in June, up from 3.4% in May, marking an 18-month high. This remains well above the Bank’s 2% medium-term target, which has not been met since the summer of 2023.

However, the economic picture elsewhere justifies a more accommodative stance. The economy contracted by 0.3% in April and 0.1% in May, triggering calls for the MPC to ease borrowing conditions and encourage household and business spending.

The slowdown has also been reflected in the labour market. According to HM Revenue and Customs, businesses have reduced their payrolls for five consecutive months, following the government’s £25 billion increase in employer national insurance contributions introduced in April.

“The economy has been weaker than the MPC anticipated,” said Sanjay Raja, chief UK economist at Deutsche Bank. “Growth has slipped below expectations in the second quarter. The jobless rate sits a touch higher than projected. Wage momentum has softened more strongly too.”

Markets are not expecting a radical shift in the Bank’s tone, with analysts predicting the Bank will emphasise a gradual and cautious approach to future cuts.

“We’d expect the Bank to cut rates this month but offer very little in terms of forward guidance, besides reiterating its bias for further ‘gradual’ and ‘careful’ cuts,” said analysts at ING.

The rate decision will be accompanied by an updated economic forecast, covering growth, inflation, and labour market conditions over the next three years. The Bank will also report on the impact of its ongoing sales of government bonds, and whether those operations have disrupted the normal functioning of the gilt market.

A rate cut to 4% would offer some relief for mortgage holders and small businesses, many of whom have been squeezed by higher financing costs over the past two years.

However, any positive effects on lending and consumer spending may be offset by uncertainty about the path ahead. With inflation still elevated, the Bank is expected to maintain a flexible stance, signalling its readiness to reverse course if price pressures intensify.

For businesses and investors, today’s announcement will serve as a key indicator of the Bank’s confidence — or caution — in the UK’s post-pandemic recovery.

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Bank of England expected to cut interest rates to 4% amid weakening UK economy