Bank of England Cuts Interest Rates to 5%, Citing Eased Inflation

The Bank of England cut interest rates by 25 basis points to 5% on Thursday, aligning with forecasts, after British consumer price inflation returned to the BoE’s 2% target in May and remained there in June, down from a multi-decade high of 11.1% in October 2022.

The decision to lower interest rates from a 16-year high followed a narrow 5-4 vote by the MPC, reflecting policymakers’ division on whether inflation pressures had eased sufficiently to begin easing monetary policy.

Governor Andrew Bailey stated that the BoE’s Monetary Policy Committee would proceed cautiously and ensure that inflation remains low. He emphasized the need for a balanced approach, avoiding cutting interest rates too quickly or excessively.

Market reaction to the BOE’s decision was limited, but overall sentiment is improving with the start of policy easing, marking the first rate cut since March 2020, after rates had been on hold for almost a year. This shift redirects focus from inflation concerns.

Currently, British inflation is lower than in the euro zone, where the European Central Bank cut rates in June, and the United States, where the Federal Reserve kept interest rates steady on Wednesday but signaled a possible September cut.

However, the BoE anticipates headline inflation to rise to 2.75% in Q4 as the impact of last year’s sharp declines in energy prices fades, before returning to its 2% target in early 2026 and eventually easing below the target level.