Bank of England cuts interest rates to 4%

The Bank of England has reduced its benchmark interest rate to 4%, marking the first cut in over a year. The move comes amid signs of tepid economic growth and mounting pressure from businesses and households struggling under high borrowing costs.

Official data from the Bank shows that UK quarterly GDP growth was just 0.1% in Q2 2025, highlighting continued sluggishness despite previous hopes for a rebound. This modest uptick follows months of economic stagnation, prompting policymakers to act to stimulate demand and ease the financial burden on consumers. Inflation, which peaked at over 11% in 2022, has fallen sharply but remains a concern.

The latest report anticipates inflation edging up in the coming months largely due to food price rises, but projects a fall back towards the 2% target in the medium term. Meanwhile, wage growth has cooled to around 5%, and the unemployment rate ticked up to 4.7% in May, underscoring persistent weaknesses in the labour market.

The Monetary Policy Committee was split on the decision, voting 5–4 to reduce the Bank Rate by 0.25 percentage points. The dissent signals ongoing uncertainty about the correct path for monetary policy in the face of global trade disruptions and domestic fiscal tightening.

A margin of spare capacity, a sign of

underutilized economic resources is estimated to have opened up, with the labour market continuing to loosen. The interest rate cut aims to encourage lending and investment, supporting growth as fiscal policy, including Chancellor Rachel Reeves’s recent moves, tightens over the coming year.

Financial markets are now keenly awaiting further signals: with inflation predicted to rise temporarily, the extent and pace of additional rate cuts remain unclear. The Bank underscored its commitment to keeping inflation low and stable, but cautioned that any future moves would be cautious and data-dependent.

Businesses have widely welcomed the cut, hoping it will alleviate cost pressures and revive confidence. However, with household saving ratios still above 10%, well above pre pandemic levels economists warn that the effectiveness of looser monetary policy depends on a return to more traditional spending habits. For mortgage holders and prospective buyers, the decision eases some pressure, but the cost of living remains elevated. Savers, meanwhile, may see returns on cash accounts fall further, intensifying a search for higher yields in equities and bonds.

“We need to be confident that inflation will remain low and stable in a lasting way. We will judge how far and how fast we can cut interest rates to achieve this.” – Bank of England Monetary Policy Report, August 2025