The UK’s central bank on Thursday cut interest rates for the first time since early 2020 — from 5.25% to 5% — and signaled that further cautious reductions may lie ahead.

Bank of England governor Andrew Bailey’s casting vote sealed the quarter-point drop in the benchmark rate.

The decision was opposed by a minority of four on the nine-member Monetary Policy Committee.

Bailey said “inflationary pressures have eased enough that we’ve been able to cut interest rates today.”

Borrowing costs had been held at 5.25% – the highest level in 16 years – since August last year.

Bailey signalled that rates would fall more gradually than they have risen over the past few years.

He said “we need to make sure inflation stays low, and be careful not to cut interest rates too quickly or by too much”.

Bailey added: “Ensuring low and stable inflation is the best thing we can do to support economic growth and the prosperity of the country.”

Meanwhile, the Bank of England expects the UK economy to grow by 1.25% this year, higher than its previous outlook of a 0.5% rise.

It kept its outlook the same for economic growth in 2025, which it expects to dip to 1%.

REACTION:

Luke Bartholomew, Deputy Chief Economist, Abrdn: “Today’s monetary policy decision always looked like a finely balanced judgement. And so it proved, with policymakers very divided, and the smallest possible majority voting in favour of a cut.

“Attention will now turn to how far and how quickly interest rates will fall from here. The Bank’s signalling talks of the risk of cutting ‘too quickly’, but its own forecasts imply that inflation will come in well below target in a couple of years if interest rates follow the path currently priced into markets.

“This might be a signal that the majority of policymakers are expecting to cut more than the market currently forecasts.

“We tend to agree with that assessment, and expect rates to fall further over the next six months. But ultimately it is the data that will determine how interest rates evolve from here, with the Bank hoping its conviction that underlying inflation pressures are fading will be vindicated.”

Sarah Coles, head of personal finance, Hargreaves Lansdown: “The Bank of England was as split as the rest of the market has been over whether a rate cut makes sense this month. In the end, a cut squeaked through for the first time since the onset of the pandemic. The fact the vote was split 5:4 goes to show how tough the decision was.

“In the end, the MPC was swayed by the fact that inflation held at 2% for a second consecutive month. It’s expected to rise back to 2.75% later this year, but that’s thanks to energy price movements a year earlier, and the Bank has always been less worried by inflation that’s driven by energy prices alone.

It’s more concerned about ‘secondary effects’ – so how inflation caused by energy price changes goes on to impact the wider economy. It is taking falling wage inflation and lower services inflation as a sign that some of the pressure here is easing.”

Jill Mackay, savings specialist at Scottish Friendly:  “The peak of the base rate lasted just shy of one year, having risen meteorically in 2022 and 2023 in order to quell inflation. The cut is good news for households under mortgage pressure but will be bad news for savers who will begin to see their interest earnings slashed.

“Despite having risen like a rocket, it is likely that rates will now fall like a feather. With the economy growing better than expected, wages rising and employment still relatively robust, the bank will be keen to take a softly-softly approach in order to not reignite inflation. Where its neutral rate lies is an open question, but it will take time to arrive at.

“For households with mortgages this is modestly good news. But for savers it is a potential issue now for cash, especially seeing as easy access rates will be sensitive to cuts. For those considering their long-term savings plans it might be worth taking a fresh look at areas such as investments in order to give their funds a better opportunity for growth.”

Kathleen Brooks, research director at XTB: “The Bank of England turned a page on Thursday. The period of high inflation is behind us, external shocks are no longer dominating monetary policy and the time for rate cuts has come.

“The Bank cut interest rates for the first time since 2020 on Thursday, in a move that was widely expected by economists, however, up until last week, the market only had a low conviction that the BOE would go ahead and cut rates. The vote was close, 5 MPC members voted to cut versus 4 who voted to hold rates.

“The usual suspects voted to hold rates: Catherine Mann, Jonathan Haskell, Huw Pill and Megan Greene, while the other members, including the Governor Andrew Bailey, all voted to cut rates. The decision was almost too close to call; however, we believe that some of those who voted to hold rates at today’s meeting could be persuaded to join the calls to cut rates in the coming months.

“Overall, although this was a close decision, the accompanying Monetary Policy report forecasts for growth and inflation are dovish and support further rate cuts from the BOE.

“The Bank’s reason for cutting rates was down to progress made in inflation. The decline in headline inflation and other inflation indicators could feed through to weaker pay and price setting dynamics and a ‘margin of slack’ could appear if the economy stalls and the labour market slows.

“The BOE statement said that it was appropriate to reduce ‘slightly the degree of policy restrictiveness’, does this mean that there is more to come?”

Steve Clayton, head of equity funds, Hargreaves Lansdown: “It’s not safe to assume this is the first cut of many. In its statement, the Bank of England said there are still inflationary risks, so while it decided a slight reduction in rates was appropriate, it went nowhere near suggesting that significant and sustained cuts are on their radar screen yet.

“Traders were already leaning toward the view that a quarter point cut in rates would be announced, with money-market rates implying a sixty percent chance of rates dropping to 5% and sterling was trading around $1.277 ahead of the Bank’s announcement, around 0.8 US cents lower on the day. With the market hearing roughly what it expected to hear, sterling made little move in response to the cut.

“Markets now have to work out what the Bank’s statement means for the medium term. The UK money-markets are predicting a series of cuts, taking rates below 4% over the next three years. That will require more evidence that inflationary forces are clearly weaker before the Bank, judging by today’s language, makes much more of a move.”

Jonathan Moyes, Head of Investment Research at Wealth Club: “Hopes of a rate cut were granted today as the Bank made the bold decision to cut rates for the first time since March 2020.

“Whisper it quietly, but an economic revival appears to be gathering pace. Recent survey data suggests the UK’s services and manufacturing sectors are performing strongly, unemployment remains low, house prices have resumed their upward trend, and the country is in a rare state of political stability. With the UK on such a positive path, the interest rate cut will add further fuel to the UK’s recovery, but this does pose questions over whether the bank risks unnecessarily stoking inflation. By the Bank’s own forecast, inflation is set to rise to 2.75% in the second half of 2024.

“Looking ahead, the Bank of England remains damned if it does, and damned if it doesn’t. All eyes will now be on Sterling, with the Federal Reserve choosing to keep rates on hold yesterday, Sterling has weakened in the minutes following the announcement. Too much of this, and the Bank may regret its newfound assertiveness.”

Lindsay James, investment strategist at Quilter Investors: “The Bank of England has finally spotted its opportunity to cut interest rates and has enacted its first reduction since the onset of the pandemic today. This will bring a huge collective sigh of relief to consumers and businesses up and down the country after interest rates reached the highest level in 16 years.

“With the market having been on the fence ahead of the announcement, with a 66% chance of a quarter-point cut, in the event the decision by the MPC was indeed a very close thing with a 5-4 majority decision. The Bank of England is making it clear to everyone this will not be a speedy journey on the way back down as it does not want to cut too quickly or by too much and risk a fresh inflationary spiral.

“In recent months inflation has eased its path from a headline rate of 4% at the start of the year down to 2% presently, although it is expected to rise back towards 3% as the year progresses and the benefit of lower energy costs compared to a year ago becomes much reduced.

“Core inflation, which strips out volatile energy and food price movements, has been more stubborn, remaining at 3.5% for the past two months. The partly reflects structural challenges in the UK labour market that will require a more complex government-led solution to address the significant extent of economically inactive people, who dwarf the unemployed by a ratio of six to one.

“Despite the headwinds that the UK economy has faced, there is an air of optimism that has for some months been desperately lacking, even if further cuts may not necessarily be as speedily forthcoming as some might like.

“Whilst the Treasury appears keen to ‘kitchen sink’ the UK finances ahead of a tax grab in the Autumn, the new Labour government is acutely aware that in order to remain in power they must not only address the legacy they have inherited but also deliver growth whilst acting with a sense of urgency in order for the electorate to not only feel better off by the next election cycle but also to avoid further gains for Reform.

“So far, this approach has been viewed reasonably positively by investors, who have first and foremost welcomed the stability a new government has offered, particularly in relation to Europe and the US where power struggles continue. However, the likely cuts to public services, paired with inevitably higher taxes by the Autumn, mean that as ever, the devil will be in the detail.”

Lily Megson, Policy Director at My Pension Expert: “In a broader sense, today’s decision to cut interest rates after a year of holding them steady is a clear recognition of the improvements in our economy. Inflation has wreaked havoc on people’s finances and curbing it has been the top priority.

“However, while a welcome relief for borrowers, the road ahead remains tough for savers and those preparing for retirement. Crucially, prices are still high; the cost-of-living crisis isn’t over yet.

“As conditions start to stabilise, many will be eager to get their savings goals back on track. But it’s key not to make any hasty decisions. For instance, some might be tempted to quickly buy an annuity, as annuity rates may fall in response to the lower interest rates. However, such decisions should always be made with careful consideration.

“Creating economic stability is vital, but equally important is supporting individuals in their financial planning. Savers need to be informed and cautious – providing access to financial education and advice to respond to these changes effectively and secure their financial futures should be the top priority for the government.”

Mark Hicks, Head of Active Savings, Hargreaves Lansdown: “A rate cut is never going to be music to the ears of savers, but this shouldn’t do too much damage. The market was split on whether we were going to get a cut, so decisive action from the Bank of England is going to mean some banks bring rates down slightly, especially among easy access accounts, but we’re not expecting massive movements.

“However, what really matters for fixed rates, both now and in the coming months, is what happens around expectations of rate cuts in the future. If the Bank of England decides to cut rates twice and then pause, we should see minimal disruption to the savings market. More consistent rate cutting of four or more would drive greater savings rate change.

“Longer-term savings rates give the clearest indication of where the market expects things to settle, and with 3-year and 5-year fixed savings rates at 4-4.5%, the market is currently not predicting any significant falls below these levels.

“At the moment, the highest easy access rate and one-year fixed rate accounts still pay over 5%, so savers can still beat inflation by an impressive margin. The highest easy access rate on HL Active Savings is 4.67% (AER) and the highest fixed rate is 5.06% (AER). When you add in the effect of the current cashback deal, this takes it to 5.26% (AER).

“If you don’t need the cash for a while, fixed term rates offer the best returns from a risk reward perspective, so it’s worth securing a rate by considering a fixed rate deal while these rates last. You can check online banks and cash savings platforms which tend to have more competitive rates.”

Kallum Pickering, Chief Economist, Peel Hunt: “Citing ‘some progress in moderating risks of persistence in inflation’, the Bank of England (BoE) decided today to lower the Bank Rate by 25bp to 5.0%. A 5-4 split decision by the nine-member Monetary Policy Committee (MPC) implies that the final decision to lower the Bank Rate fell to Governor Andrew Bailey.

“The uncertainty around market expectations heading into the meeting as well as the close vote split reflects the two-sided risks to the inflation outlook and the reality that there were good arguments to both hold and to cut the Bank Rate at this month’s meeting.

“In reality, the small 25bp reduction in the Bank Rate will not have a material direct positive impact on economic activity. Symbolically, however, it is important. It marks the end of the aggressive tightening cycle that the BoE had to undertake in 2022 and 2023 in response to surging inflation. Today’s cut will likely reinforce expectation of future cuts, which may support household confidence and risk taking in financial markets.

“We expect the BoE to hold at its next meeting in September before cautiously lowering the Bank Rate again in November. But this near-term path is uncertain. The BoE will remain data-dependent and judge policy on a meeting-by-meeting basis.

“Upside surprises to inflation, wages or key components within the inflation basket such as domestic-oriented services prices could push back further cuts to 2025. In addition to our expectation for a November cut, we continue to look for four 25bp cuts in 2025 to take the bank rate to 3.75% by year end. We do not expect any changes to the Bank Rate in 2026.”

“There are still some reasonable concerns about services inflation. But with overall inflation still forecast to fall below the MPC’s 2% target over the medium term, leaving rates on hold would have been more damaging for credibility than a small cut.”