Bank of England cuts rates to stop UK slowdown turning into a slump

The Bank of England cut its key interest rate by a quarter-point to 4 percent, as fears of a U.K. economic slowdown outweighed concerns about lingering inflation.

Growth has gone into reverse in recent months after a strong start to the year: The Office for National Statistics has tentatively estimated that the economy contracted in both April and May, under pressure from Chancellor Rachel Reeves’ tax hikes and U.S. President Donald Trump’s trade war.

However, the BoE raised its growth forecast slightly for this year, to 1.25 percent, estimating that growth was still positive in the second quarter, at 0.1 percent, and would pick up again to 0.3 percent in the current quarter.

But Reeves’ decision last year to increase employers’ National Insurance contributions and jack up the National Living Wage have led companies to shed jobs, pushing unemployment up to its highest in four years. The Bank said in its new Monetary Policy Report on Thursday that it expects the jobless rate to hit 4.9 percent by the end of the year, from 4.7 percent in June.

The cut is the fifth in 12 months but still leaves rates at a level that most economists think is holding the economy back. The Bank warned again on Thursday that stubborn inflation — most visible in food and services prices — still demand that any further relaxation of monetary policy be “gradual and cautious”.

Inflation has rebounded this year after falling from a peak of over 11 percent in 2023. The Bank said on Thursday it could hit 4.0 percent by September and won’t return to its 2 percent target before 2027.

Against that backdrop, four of the BoE Monetary Policy Committee’s nine members voted against the cut, including chief economist Huw Pill and Deputy Governor Clare Lombardelli. Alan Taylor, who has consistently placed more emphasis on the risks of a slump, initially voted for a bigger, half-point cut.