Tug of War Behind the 4% Rate: Bank of England’s First Dual-Round Vote Exposes Deep Policy Rift

TradingKey - At noon local time, the Bank of England (BoE) announced a 25 basis-point rate cut, bringing the benchmark interest rate down to 4%. This marks the fifth cut in the current easing cycle. However, the decision-making process was highly unusual—the first dual-round vote in the bank’s history—highlighting intensifying divisions within the Monetary Policy Committee (MPC) amid an increasingly complex macroeconomic backdrop.

Among the nine MPC members, Governor Andrew Bailey and three others voted in favor of the cut, while another four preferred to hold rates steady. External member Allen Taylor, who initially supported a more aggressive 50-basis-point cut, shifted his stance in the second round after a 4-4-1 deadlock in the first vote. His switch allowed the 25bp cut to pass narrowly with a 5–4 majority. Notably, Deputy Governor Dave Lombardelli broke ranks with Bailey for the first time, siding with the dissenters—a sign that internal divisions have reached the top echelons of the central bank.

The sharp split reflects the mismatch between inflationary pressures and weak growth prospects. In its post-meeting forecast, the BoE raised its projection for the September inflation peak to 4%, up from the previous 3.7%, and pushed back the expected timeline to reach the 2% inflation target to Q2 2027. While the bank continues to expect a gradual decline in medium-term inflation, it also warned that rising food prices and persistent wage pressures could drive inflation higher in the near term.

On the growth front, the outlook remains fragile. The UK economy is expected to grow only 1.25% in 2025, with long-term potential growth remaining subdued. The BoE noted that while trade-related uncertainties have eased slightly, weak domestic consumption, higher household saving rates, and a softening labor market will continue to weigh on economic activity.

In a rare move, the BoE also issued a caution on its quantitative tightening (QT) strategy. The meeting minutes flagged that the combination of elevated global rates, structural shifts in the UK bond market, and rising sovereign issuance could put strain on market liquidity. The bank hinted it may adjust the pace of long-term gilt sales in September to avoid excessive disruption.

Market reactions reflected the cautious tone. The British pound briefly rose about 30 pips against the U.S. dollar, while 10-year gilt yields edged higher. In a press conference, Bailey said the decision was “a particularly delicate one,” emphasizing the need for continued caution going forward.