Bank of England cuts interest rates in surprise split vote

Bank of England governor Andrew Bailey at the Bank Of England today. Photo: Carlos Jasso. WPA Pool/Getty Images.

The Bank of England’s decision earlier today to cut interest rates, which was delayed to 12:02pm to observe a two-minute silence for VE Day, drew zero surprise.

Fresh headwinds to the global economy, largely due to Trump’s trade wars, together with cooling UK inflation, had paved the way for lower rates.

The Monetary Policy Committee (MPC), the nine-person group tasked with controlling interest rates, voted by a majority of five to four to cut the Bank Rate by 0.25 percentage points to 4.25% - its lowest level in more than two years.

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This outcome may have been widely expected, but the vote split has raised some eyebrows. In terms of the dissenters, two members preferred a more aggressive 0.50 percentage point reduction, while two others felt rates should be kept on hold, underscoring the delicate position central banks find themselves in right now.

In its summary, the Bank referenced how events across the Atlantic have influenced its decision: “Uncertainty surrounding global trade policies has intensified since the imposition of tariffs by the United States and the measures taken in response by some of its trading partners. There has subsequently been volatility in financial markets, and market-implied policy rates have moved lower. Prospects for global growth have weakened as a result of this uncertainty and new tariff announcements, although the negative impacts on UK growth and inflation are likely to be smaller.”

The trajectory of UK inflation was a key factor in today’s cut after the consumer prices index (CPI) unexpectedly eased to 2.6% in March. The MPC recognised that while UK inflation is expected to temporarily peak at 3.5% on average in Q3 2025, because of higher energy prices, the risks around path of price rises were “two-sided”.

“Based on the committee’s evolving view of the medium-term outlook for inflation, a gradual and careful approach to the further withdrawal of monetary policy restraint remained appropriate,” the Bank said, suggesting it will continue to adopt a cautious stance on rate cuts. Policymakers have alternated between cuts and holds since August 2024.

Stagflation rearing its ugly head?

The US Federal Reserve yesterday took a wait and see attitude, maintaining rates at a benchmark of 4.25-4.5% for the third meeting on the bounce, resisting calls from President Donald Trump to wield the axe. Explaining its decision, Fed chair Jerome Powell cited the uncertainty created by Trump’s ongoing tariff debacle, which is stoking stagflation fears.

Powell said: “If the large increases in tariffs that have been announced are sustained, they are likely to generate a rise in inflation, a slowdown in economic growth, and an increase in unemployment.”

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The UK central bank must also not overlook the threat of stagflation. Inflation’s path is unclear, economic growth is lethargic, and businesses have warned that the employer National Insurance hikes will harm the jobs market.

Stagflation makes policy decisions trickier as attempting to tame one metric could inflame another, helping to explain today’s split vote. By cutting rates, the MPC hopes it will spur economic growth, but as lower interest rates push down mortgage costs, putting more money in our pockets, it could stoke inflation.

Impact of lower interest rates on your money

Among the winners today are borrowers, who have faced soaring mortgage costs in recent years as the Bank jacked up interest rates between December 2021 and August 2023 to tame runaway inflation.

And even before today’s decision, lenders started to offer better deals to the market. Yesterday, Britain’s biggest and most well-known building society, Nationwide, slashed rates across several fixed and variable rate mortgages, and rivals Virgin and TSB are reportedly following suit. As a price war heats up, budding homeowners and those with deals expiring soon could be set to benefit. Meanwhile, borrowers on variable rates will see their mortgage costs reduce straightaway.

A drawback of falling interest rates is that any cash you hold will attract lower returns. Improved savings rates have been a silver lining of the cost-of-living crisis, with the top rates outstripping inflation for the first time in years. But as interest rates fall, the gap will inevitably narrow, and with inflation anticipated to pick up again in Q3, the two could soon reach parity.

According to Moneyfacts data, in the past 12 months the average easy access account has fallen from 3.11% to 2.79%, while the average notice account has fallen from 4.27% to 3.78%.

A key risk with holding money in cash is that if inflation outpaces the rate you receive, your money will erode in ‘real terms’, reducing its future buying power.

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It’s therefore important to get the most bang for your buck, especially if the size of your savings pot is meaningful. Worryingly, new research from Accenture, the consultancy, found that nearly six in 10 Brits (59%) don’t know the interest rate on their main savings account.

With rates coming down, it’s a timely juncture to revisit the role you would like any cash to play in your portfolio. There is no right or wrong answer with regards to how much you should hold. It’s a personal decision and will depend on things like your attitude to risk, planned short-term spend and preference to keeping some dry powder for stock buying opportunities. In any case, an amount equal to three-to-six months expenditure to cover emergencies should provide a tidy safety net.

However, if you don’t need the money for five or more years, it might be better off in the stock market. Share prices have been rocky recently in light of Trump’s tariffs, but over the long term you should have time to ride out the bumps and grow your portfolio quicker than keeping it on deposit.

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A consideration for investors is whether to position their portfolio differently in a falling interest rate environment. Lower rates usually have positive implications for the stock market. As people have more money to spend, businesses should stand to benefit, which in turn can push up share prices. UK stocks edged up marginally this morning ahead of the Bank’s third interest rate decision of 2025.

Something to note is that some sectors tend to perform better than others when interest rates are coming down. Among the usual losers are banks, as lower rates squeeze the margins they can make between borrowings and savings, while infrastructure and property companies are typically among the winners.

But for most investors, especially those who prefer a long-term buy and hold approach, usually the best thing to do is plough on with your current strategy. Constantly tinkering with your portfolio to navigate changing economic conditions can do more harm than good, as it may increase trading costs and lead to emotional decision-making.

It’s often better to avoid quick wins and keep your focus on the bigger picture, with any portfolio tweaks made with the long term in mind. Making sure your portfolio is diversified across different assets classes, regions and sectors is great way to position yourself for whatever lies ahead, both in the immediate and distant future.