Bank of England cuts by 25bps, but MPC far from unanimous

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

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“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. The 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%.”

What does it mean for your personal finances?

Craig Rickman, Personal Finance Expert, interactive investor says, “The Bank’s decision to cut interest rates delivers a welcome boost to households seeking to protect their finances from stubborn cost-of-living rises, particularly those with variable-rate borrowings who will see monthly repayments fall immediately.

“Falling interest rates offer a timely juncture to review your short- and long-term financial goals. The amount you can earn on your savings, other than money you’ve locked away for a fixed term, should fall over the coming days and weeks, putting it at greater risk of being eroded by inflation. The security and certainty of cash holds obvious attractions, but unless you need the money to cover emergencies or fund purchases within the next five years, history tells us the stock market offers better odds at growing your wealth.

“But whatever your financial objectives and investing time frame, one of the simplest ways to keep more of your wealth and protect yourself from future tax rises is to use tax wrappers like pensions and ISAs – just make sure you use the correct type for the specific financial goal you’re trying to achieve.

“In the past 48 hours, interest rate changes have been overshadowed by warnings of significant tax hikes later this year. We should note it’s no more than speculation at this stage, which is crucial to bear in mind before making any knee-jerk decisions with your long-term wealth.”