Lower interest rates to 4%, advocates City AM's Shadow Monetary Policy Committee
The Bank of England (BoE) is set to make a decision on interest rates this Thursday, and market expectations and expert polling suggest a 25 basis point cut is very likely. This move would continue the cautious easing trend, as the BoE balances the need to control inflation with supporting economic growth.
The BoE's Monetary Policy Committee (MPC) narrowly voted for a 25 basis point cut on August 7, 2025, reducing the Bank Rate to 4.0%, the lowest since March 2023. Governor Andrew Bailey emphasized a "finely balanced decision" and signaled that while rates are on a downward path, future cuts must be gradual and cautious given inflation risks.
Inflation remains above the target of 3.0% due to wage increases, taxes, and food prices, complicating decisions for the MPC. Eight economists in City AM's Shadow MPC, including Vicky Pryce, Jessop, Kallum Pickering, Katharine Neiss, Ben Ramanauskas, Jack Meaning, Anna Leach, and Ruth Gregory, voted for a 25 basis point cut.
However, not all economists agree on the need for a rate cut. Jonathan Haskel, a professor of Economics at Imperial College Business School, expressed concern that cutting rates with inflation above target could embed wage pressures further. He suggested the case for cutting interest rates would be on wage growth being lower than expected and a weak demand outlook.
Despite these concerns, the majority of economists believe that the broad-based moderation in demand and rising labour market slack will bring inflation towards the 2.0% target once temporary energy and regulated price effects have faded. Katharine Neiss, for example, believes a declining labour market will lead to weaker domestically-generated inflationary pressures over the medium term.
Pryce noted much of the recent uptick in inflation is caused by domestic arrangements which allow certain prices to adjust upwards each spring, but this should iron out over the next few months. Julian Jessop, on the other hand, sees the economy stalling again, the labour market and wage growth cooling rapidly, and growth in broad money easing from an already slow pace.
As the BoE prepares to make its decision, it is important to remember that the economy is experiencing high inflation and a rising unemployment rate. The current interest rate stands at 4.25%, and the MPC will need to carefully consider the impact of any rate cut on both inflation and economic growth.
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