The UK central bank on Thursday cut interest rates to 4% from 4.25% after a tight 5-4 vote by the bank’s Monetary Policy Committee (MPC).

Four of the central bank’s nine policymakers, concerned about inflation, tried to keep borrowing costs on hold.

The MPC was forced to hold two votes for the first time in its history — after a first round of voting ended in a 4-4-1 split with external MPC member Alan Taylor initially supporting a half-point cut.

Central bank governor Andrew Bailey and four colleagues voted to lower the Bank Rate to 4%.

Bailey said: “We’ve cut interest rates today, but it was a finely balanced decision. Interest rates are still on a downward path, but any future rate cuts will need to be made gradually and carefully.”

The four members of the MPC who wanted to keep rates on hold included deputy governor for monetary policy Clare Lombardelli. Chief Economist Huw Pill also voted to keep the Bank Rate at 4.25%.

UK government bond yields rose after the central bank’s announcement.

REACTION:

Victoria Scholar, Head of Investment, interactive investor: “In an unprecedented move, the Bank of England was forced to carry out two rounds of voting to reach its decision.

“The central bank ultimately decided to meet market expectations by cutting interest rates by 25bps to 4% in a tight 5-4 vote split. Greene, Lombardelli, Mann and Pill dissented by voting to keep rates on hold, clearly spooked by inflation. In the first round of voting, Alan Taylor voted for a 50 basis point cut, leaving the outcome inconclusive with a 4-4-1 split. In the second round he pared back his vote to a 25bp cut.

“The contentious vote underscores the complexities of today’s decision. Monetary Policy Committee (MPC) has been weighing up significant price pressures which would in isolation warrant a hawkish stance, versus the slowing growth outlook with particular weakness in the unemployment data.

“The UK economy faces clear signs of deterioration – it is buckling under the pressure from global trade instability, a slowing UK labour market, above-target inflation hitting 3.6% last month, and a fiscal blackhole that increases the chances of higher taxes in the Autumn Budget.

“While today’s rate cut was widely expected, it is unclear whether there will be another rate cut in November with a lot riding on next week’s unemployment and GDP figures as well as data next month.

“In terms of the Monetary Policy Report (MPR), the Bank of England raised its inflation forecasts with CPI expected to hit 2.7% in one year’s time up from May’s forecast for 2.4%. Food price inflation is expected to peak at 5.5% by the end of 2025, partly due to the minimum wage and national insurance increases. In two years’ time inflation is expected to return to the 2% target and remain there the following year.

“Its unemployment forecast also worsened to 4.9% in the fourth quarter, up from 4.7%. However on a more positive note, it expects better growth of 1.25% in 2025, up from 1%.”

Yael Selfin, chief economist at KPMG UK: “The close vote split and the minutes of the meeting underscore the division on the MPC.

“The division reflects the two-sided risks to the inflation outlook and the uncertainty under which policymakers are operating.”

Scottish Friendly savings expert Kevin Brown: “The Monetary Policy Committee didn’t disappoint, cutting rates to 4% as expected. The move came in spite of inflation hitting 3.6% in June, significantly ahead of the Committee’s target of 2%.

“The cut suggests policymakers believe that a slowing labour market and lacklustre economic growth will combine to bring inflation under control over the next few months. The Committee has previously said it would be willing to cut rates if the job market showed signs of weakening. Employment data earlier in July showed signs of rising unemployment and slowing wage growth.

“There remain concerns over the persistency of price rises, particularly in areas such as food, energy and labour costs. Nevertheless, prices are expected to drop in the latter half of 2025 and into 2026.

“The interest rate cut had been widely anticipated and is therefore likely to be reflected in government bond markets already. Mortgage rates had already been coming down and are unlikely to move significantly lower as a result. However, the cut may have an impact on savings rates and should be a catalyst for savers to shop around for the best rates to ensure their cash holdings are outpacing inflation.”

Kathleen Brooks, research director at XTB: “The pound has surged this afternoon, after the Bank voted to cut interest rates, as expected, however, the vote was on a knife edge. The tight vote split, with 5 members voting for a cut, while 4 members voted to remain on hold, is the most noteworthy part of today’s decision.

“The Governor said that the decision was finely balanced and the hawkish camp at the BOE seems to have gained a new member. Claire Lombardelli, who in the past was in the dovish camp, voted to keep rates on hold …

“This suggests that far from opening the door to more rate cuts as the economy stalls and the labour market weakens; the power balance has shifted to the hawks. The immediate aftermath of this meeting has seen a repricing of interest rate expectations for the UK.

“There is now less conviction that a second rate cut will come later this year. Currently there is 21 bps of cuts priced in by year end, which just shy of another cut. Looking ahead, interest rates are expected to be 3.5% in a year’s time, which is slightly higher than before the meeting …

“Unsurprisingly, the BOE upgraded their inflation forecasts, and inflation is expected to rise to a peak of 4% in September, and to fall back to 2% in 2026. However, the BOE caveated this forecast by saying that higher service prices could keep inflation elevated for longer than expected.

“The path of interest rates will be determined by inflation, and the BOE’s statement said that that ‘We need to be confident that inflation will remain low and stable in a lasting way’ before they can judge ‘how far and how fast’ they can cut interest rates …

“This suggests that the BOE is firmly focused on the inflation picture. Ahead of this meeting, there was some expectation that the BOE could start to focus on the cracks that are starting to appear in the labour market. The labour market report  for July is released next week, which will give us an update on the UK’s job creation in the aftermath of the rise in employers national insurance payments.

“The BOE may have upgraded their forecasts for the unemployment rate in the August Monetary Policy report, however, the unemployment rate is expected to peak at 4.9% next year, which is still extremely low by historic standards.”

Susannah Streeter, head of money and markets, Hargreaves Lansdown: “Bank of England policymakers are still playing a highly cautious hand. Although the Bank has opted for a cut, the chances of another reduction by the end of the year have receded sharply. The Monetary Policy Committee is split five to four between cut and hold, so it’s pointing to a very prudent approach ahead. The FTSE 100 has fallen further into the red, as high borrowing costs look set to linger.

“Amid trade turmoil, wary business sentiment and rising unemployment, the UK economy is going in the wrong direction, and the Bank of England wants to give it a chance to get back on track. President Trump’s playing an unpredictable game of trade chess, high on tactical moves, and it’s still unclear where all the pieces will land. While the UK appears to have shifted into a more resilient position, with slightly less onerous tariffs than other nations, it won’t be immune to the fallout from the global economy.

“But in the background, the kettle of rising prices is still whistling. Inflation remains unhelpfully high and is expected to hit peak obstinacy of 4% in September – double the bank’s target. Consumers are continuing to show resilience in spending patterns in parts of the economy, and the worry will be that employers will keep paying inflation-busting wages, which could fuel prices further. So even though we’ve had a cut today, borrowers will need to find big reserves of patience and may have to wait until next year to see costs fall back significantly.

“It means the boost to growth Chancellor Rachel Reeves needs to help bolster the public finances and ease the squeeze on spending looks set to stay elusive, which is why tax rises in the Budget look set to be on the cards.’’