UK economy prepares for fifth rate cut, BOE balances inflation spike

The Bank of England (BoE) is expected to lower interest rates to 4%, their lowest level in more than two years, as it grapples with a weakening economy and a labor market hit by rising taxes.

Economists and markets widely anticipate a 25 basis point cut, maintaining the central bank’s current once-per-quarter pace of monetary easing. The decision will be announced at 12 p.m. in London, followed by a press conference with Governor Andrew Bailey at 12:30 p.m.

The rate cut would mark the fifth consecutive quarter-point reduction, bringing UK rates below those of the U.S. Federal Reserve, which last moved in 2024 and currently holds its benchmark at 4.25%–4.5%.

The Monetary Policy Committee (MPC) is expected to stick with its cautious guidance of “gradual and careful” reductions, as inflation pressures re-emerge. June inflation came in at 3.6%, higher than the bank’s 3.4% forecast and its highest reading in 17 months, driven by surging energy and food prices. The BoE may now revise its near-term inflation outlook closer to 4% for the year.

Governor Bailey has downplayed the spike as temporary, but Chief Economist Huw Pill and others have warned of second-round effects feeding into wages and core inflation.

BoE faces mounting growth risks as job losses soar

Meanwhile, growth concerns have intensified following back-to-back contractions in the spring and rising unemployment tied to April’s payroll tax and minimum wage hikes. More than 180,000 jobs have been lost since Chancellor Rachel Reeves announced a £26 billion increase in employer national insurance contributions, pushing the unemployment rate to a four-year high.

The MPC is expected to highlight these labour market challenges in its updated projections. In May, it forecast growth of 1% in 2025 and 1.25% in 2026, though recent data suggests a potential upward revision after better-than-expected Q1 performance and an upgraded estimate for Q2 growth.

The decision is likely to expose divisions within the nine-member MPC. A Bloomberg survey suggests a three-way split: most members favouring a 25bp cut, two pushing for a larger 50bp move, and two likely to vote for no change. Pill and external member Catherine Mann, who opposed cuts in May, are expected to maintain their stance, while Swati Dhingra and Alan Taylor may advocate for a more aggressive reduction.

While today’s move is mostly priced in, traders will be watching closely for any change in forward guidance. Markets expect one more cut this year, likely in November, bringing the rate down to around 3.5% by 2026.

“The risks are tilted in a hawkish direction,” said Dan Hanson, Chief UK Economist at Bloomberg Economics. “The committee may signal it’s rethinking its once-a-quarter pace, implying a November cut isn’t guaranteed.”

BoE reconsiders bond sales strategy as long-dated gilt yields surge

Attention is also turning to the BoE’s balance sheet reduction strategy. Quantitative tightening (QT) has already reduced bond holdings by about £100 billion annually, but market strain—especially in long-dated gilts—has sparked speculation that the BoE could slow or shift the pace of sales.

Governor Bailey has recently flagged concerns over rising 30-year gilt yields, reaching levels last seen in the late 1990s. A pivot toward shorter-dated debt or a reduced pace of active sales (currently expected at £26 billion a year) may be under consideration ahead of the BoE’s September QT update.

According to Sanjay Raja, Chief UK Economist at Deutsche Bank, a signal acknowledging long-end liquidity issues could foreshadow changes in the BoE’s sales strategy.

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