The Bank of England (BoE) has cut interest rates but warns that inflation will rise before falling back again.
The Bank’s Monetary Policy Committee (MPC) voted by a slim majority of 5-4 to reduce the interest rate by 0.25 percentage points, to 4.25%.
Two members preferred to reduce Bank Rate by 0.5 percentage points, to 4%. Two members preferred to maintain Bank Rate at 4.5%.
Last month, it voted by a majority of 8–1 to leave the rate unchanged.
Sue Robinson, chief executive of the National Franchised Dealers Association (NFDA), representing car and commercial retailers across the UK, said: “The Bank of England has reduced interest rates further to 4.25%, following similar cuts in August and November last year.
“This decision will help to ease some of the pressure on both consumers and dealerships amid ongoing economic uncertainty.”
The Bank said that there had been “substantial progress” on disinflation over the past two years, as previous external shocks have receded, and as the restrictive stance of monetary policy.
“That progress has allowed the MPC to withdraw gradually some degree of policy restraint, while maintaining Bank Rate in restrictive territory so as to continue to squeeze out persistent inflationary pressures,” it explained.
Underlying UK GDP growth is judged to have slowed since the middle of 2024, and the labour market has continued to loosen.
Progress on disinflation in domestic price and wage pressures is generally continuing, while 12-month CPI inflation fell to 2.6% in March from 2.8% in February, close to expectations in the February Monetary Policy Report.
Although indicators of pay growth remain elevated, it said, a significant slowing is still expected over the rest of the year.
“Wholesale energy prices have fallen back since the February report,” it added. “Previous increases in energy prices are still likely to drive up CPI inflation from April onwards, to 3.5% for 2025 Q3. Inflation is expected to fall back thereafter."
Uncertainty surrounding global trade policies has intensified since the imposition of tariffs by the United States and the measures taken in response by some of its trading partners, it added.
“There has subsequently been volatility in financial markets, and market-implied policy rates have moved lower,” the Bank said.
“Prospects for global growth have weakened as a result of this uncertainty and new tariff announcements, although the negative impacts on UK growth and inflation are likely to be smaller.”
Responding to the Bank of England's decision to cut interest rates, Julian Jessop, economics fellow at the free market think tank, the Institute of Economic Affairs, says that the MPC’s majority decision to cut rates by another quarter point was widely expected and “fully justified” by the downside risks to inflation and growth.
“The only real surprise was the split, with two members voting for a half point cut and two for no change” he said.
“The three-way split on the MPC sends mixed signals about the future path of interest rates and may disappoint those looking for more clarity.
“In part this reflects the variable quality of the official statistics, notably on the state of the labour market.
“Nonetheless, the diversity of views is a fair reflection of the heightened economic uncertainty, both at home and abroad.”
If anything, Jessop says that the “lack of groupthink is something to cheer”.
“It would be more worrying if nine rate-setters all came to exactly the same conclusion despite the many unknowns, including the fallout from a global trade war,” he added.
“It is also good to see a whole section of the Monetary Policy report devoted to developments in broad money. This included an acknowledgement that these developments might be signalling downside risks to activity and inflation, albeit with 'significant uncertainties'.”
The committee says it remains focused on returning CPI inflation sustainably to target (2%) in the medium term.
In deciding the appropriate degree and pace of monetary policy adjustments required to achieve this, it says it considered a range of possibilities for how domestic inflationary pressures could evolve, as well as the broader circumstances that could necessitate varying the course of policy.
The May report sets out two illustrative scenarios.
In one scenario, there could be weaker supply and more persistence in domestic wages and prices, including from second-round effects related to the near-term increase in CPI inflation.
In another scenario, inflationary pressures could ease more quickly owing to greater or longer-lasting weakness in demand relative to supply, in part reflecting uncertainties globally and domestically.
It concluded: “Based on the committee’s evolving view of the medium-term outlook for inflation, a gradual and careful approach to the further withdrawal of monetary policy restraint remains appropriate.
“The committee will continue to monitor closely the risks of inflation persistence and what the evidence may reveal about the balance between aggregate supply and demand in the economy.
“Monetary policy will need to continue to remain restrictive for sufficiently long until the risks to inflation returning sustainably to the 2% target in the medium term have dissipated further.”
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