Why the Bank of England is poised to cut rates again
After a year of gradual rate reductions, all eyes are on this Thursday’s Monetary Policy Committee (MPC) meeting. Economists widely predict a 0.25 percentage point cut in Bank Rate, taking it down from 4.25% to 4%. This would mark the sixth reduction since June 2024, when rates peaked at 5.25%.
Stagnant growth and rising unemployment
Official data from the Office for National Statistics (ONS) underscore the pressure on policymakers. In the three months to May, the UK economy contracted for the second consecutive month, while unemployment climbed to 4.7%—its highest level in four years. Slowing hiring and lacklustre GDP figures are classic signals for the Bank of England to ease monetary settings.
Wage growth slows to three-year low
In the same period, average earnings excluding bonuses rose by just 5.0%, the weakest pace since mid-2022. With household budgets squeezed and inflation still above target, the MPC faces a delicate balancing act: cutting too soon may risk reigniting inflation, while waiting longer could stifle growth further.
Governor Bailey’s conditional support
Earlier this month, Governor Andrew Bailey signalled the Bank’s willingness to lower rates if labour market conditions deteriorate. The recent rise in unemployment provides that trigger. Morgan Stanley economists note that a weak jobs outlook gives the MPC more confidence to move rate settings closer to what they view as ‘neutral’—the level neither stimulating nor restricting economic activity.
Oxford Economics predicts a cautious cut
Andrew Goodwin, chief UK economist at Oxford Economics, warns it would be “a major surprise” if the MPC does not implement a 25 bps cut. He argues that with pay growth cooling and rates still above neutral, the case for further easing is strong. However, Goodwin doubts the Bank will accelerate its pace of cuts, as signs of slower job losses “significantly reduce the urgency.”
Barclays sees a split vote
Jack Meaning of Barclays UK expects a rate cut to 4% but anticipates a three-way vote among the nine MPC members. He predicts two members voting to maintain 4.25%, and two pushing for a larger 0.5% cut. Meaning points to a “lack of smoking gun” in recent data, which may encourage a majority to remain “gradual, careful and non-committal” on further cuts this year.
Inflation risks linger
Despite economic weakness, inflation remains above the 2% target. June saw the fastest rise in consumer prices in 15 months, driven largely by food costs. Some MPC members may fear that cutting too soon could reverse hard-won progress in bringing inflation down, especially if energy and wage pressures re-emerge.
Impact on mortgages and borrowers
If Bank Rate drops to 4%, refinancing options and new mortgage deals should become cheaper. Many fixed-rate mortgages track the official rate, so homeowners could see lower monthly payments. However, lenders may proceed cautiously, passing on only part of the cut to borrowers until the outlook for inflation is crystal clear.
Looking ahead: the road to neutral
With the next Consumer Price Index release due later in August and a new round of employment figures in early September, the MPC will monitor whether inflationary pressures ease further. If unemployment continues rising and wages weaken, markets and economists alike expect two more 25 bps cuts before year end. Yet any fresh uptick in inflation could prompt the Bank to pause and reassess.