Lower interest rates to 4%, advocates City AM's Shadow Monetary Policy Committee
Bank of England Lowers Interest Rates Amid Economic Challenges
The Bank of England has announced a decision to cut the Bank Rate by 25 basis points to 4.00%, marking a shift in monetary policy amid ongoing economic struggles. The decision, made at the August 2025 meeting, was met with a close 5-4 vote in favour of the cut rather than maintaining the current rate of 4.25%.
The move aligns with the expectation from the Shadow Monetary Policy Committee, where 8 out of 9 economists voted for a 25 basis points cut. The decision comes at a time when the UK is grappling with stagnating growth, inflation above the 2% target (around 3.5-3.6%), and external pressures such as US tariffs.
Inflation, although declining over the last two and a half years, remains elevated due to energy, food, and administered prices. Pay growth, while easing, remains high. Unemployment rate has risen to 4.7%.
The Bank of England has taken a "gradual and careful" approach, consistent with Governor Andrew Bailey’s guidance. This decision signals that the monetary policy stance will remain vigilant in suppressing inflationary pressure while supporting economic growth.
Jonathan Haskel, a professor of economics at Imperial College Business School, voted against the cut, citing concerns about inflation remaining above target and services inflation being "remarkably sticky". He suggested a case for cutting interest rates would be on wage growth being lower than expected and a weak demand outlook.
On the other hand, economists such as Ben Ramanauskas, Julian Jessop, Kallum Pickering, Ruth Gregory, Jack Meaning, Katharine Neiss, Vicky Pryce, and Anna Leach voted in favour of the 25 basis points cut.
Jessop and Pickering believe that a broad-based moderation in demand combined with rising labour market slack will bring inflation towards the two per cent target once temporary energy and regulated price effects have faded. Gregory notes a near-term rise in inflation could cause households to push for bigger pay rises, but with the weakening in the jobs market gathering pace, it is probably only a matter of time before inflation returns to the two per cent target.
Neiss believes a declining labour market will lead to weaker domestically-generated inflationary pressures over the medium term. Pryce believes the slowing economy is suffering from too long a period of high interest rates, and much of the recent uptick in inflation is caused by domestic arrangements which allow certain prices charged to consumers to adjust upwards each spring, but this should iron out over the next few months.
The Bank of England's decision underscores the ongoing challenges faced by the UK economy and the careful balance the central bank must maintain between controlling inflation and supporting economic growth. The next interest rate decision is expected on Thursday.
- The Bank of England's decision to lower interest rates highlights the complex interplay between economics, politics, and finance, as they strive to manage inflation, encourage economic growth, and navigate external pressures, such as US tariffs and taxes.
- The debate among economists reveals a divergence in opinions on the best approach to tackle the UK's economic difficulties, with some advocating for further cuts in interest rates to stimulate business and growth, while others express concerns about potential inflationary pressures.
- With the upcoming interest rate decision on Thursday, focus remains on how the Bank of England monitors both the economic recovery and inflation levels, as political and financial implications intertwine.
