The Bank of England has lowered its Bank Rate from 4.50% to 4.25% after a narrow 5-4 vote by the Monetary Policy Committee (MPC) on 8 May. The decision follows a run of weaker economic indicators and reflects concern that new United States tariffs and knock-on effects on global trade could slow growth and, over time, push down prices.
The quarter-point move is the fourth cut since last August, leaving the policy benchmark at its lowest since May 2023. Two MPC members argued for a larger half-point cut to 4 %, while two favoured no change, underscoring the heightened uncertainty surrounding both inflation and demand.
Andrew Bailey, Governor of the Bank of England, said:
“The past few weeks have shown how unpredictable the global economy can be. That’s why we need to stick to a gradual and careful approach to further rate cuts. Ensuring low and stable inflation is our top priority.”
Sluggish outlook for growth and inflation
In its latest Monetary Policy Summary, the Bank trimmed projections for gross domestic product, warning that output could be 0.3% smaller in three years than it forecast in February. Growth is expected to be “almost stagnant” for the remainder of 2025, held back by trade frictions, higher utility bills and last month’s £25 billion rise in employer National Insurance contributions.
Consumer price inflation is now peaking at about 3.5% in the third quarter before easing gradually. However, the Bank does not expect CPI to return to the 2% target until spring 2027, nine months earlier than previously projected but still well beyond its standard two-year horizon. Cheaper energy and imported goods are set to offset some of the upward pressure from domestic service costs.
What the cut means for businesses
For corporate borrowers, the reduction offers limited but welcome relief. Floating-rate loans linked to the base rate will reset 25 basis points lower, trimming interest expense at a time when margins are already under strain. Mortgage holders on variable deals will also see repayments fall, while savers face further pressure on cash returns.
Businesses may wish to revisit debt profiles, stress-testing cashflow forecasts against the possibility of slower revenue growth and further, albeit gradual, rate cuts later this year. Firms with significant US exposure should model the impact of both the UK-US tariff deal, which lowers duties on cars, steel and aluminium, and wider global friction on supply chains and export demand.
Rachel Reeves’s increase in employer National Insurance, coupled with still-elevated wage settlements, complicates the picture. The Bank cautioned that higher payroll costs could filter through to prices, justifying a measured approach to easing. Advisers should therefore remain alert to a scenario where borrowing costs stay above their pre-pandemic average for an extended period.
Market reaction and future path
Gilts sold off and sterling edged higher after the announcement as traders pared back expectations of back-to-back cuts in June. Markets now expect one or two additional quarter-point reductions by year-end. However, some forecasters argue that lingering inflation and sticky wage growth could limit the scope for easing until 2026.
The National Institute of Economic and Social Research has taken a similarly cautious stance, predicting only one further cut next year to keep medium-term inflation expectations anchored. By contrast, the Trades Union Congress contends that more aggressive action is needed to shield households and support investment.
Paul Nowak, TUC General Secretary, said:
“Lower borrowing costs will ease pressures on households, helping families with their weekly budgets and leaving them with more to spend. And it will make it more affordable for businesses to invest and grow.”
For now, the MPC has reiterated that policy is not on “autopilot” and future moves will depend on incoming data. Businesses should monitor the macro backdrop closely, particularly indicators of consumer confidence, input cost inflation and credit conditions.
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