The Bank of England is expected to cut interest rates on Thursday, marking its fifth consecutive reduction in a year, as economic policymakers remain divided over balancing inflation concerns with rising unemployment.
Market analysts predict a near-certain quarter-point interest rate cut from 4.25%, following a similar move in May. This anticipated decision could bring relief to millions of households and businesses grappling with the cost of living, particularly in the wake of higher mortgage payments and stagnant growth.
Rate Cuts Offer Mortgage Relief for Homeowners
Labour officials have welcomed the expected move, with Chancellor Rachel Reeves citing the cut as evidence of restored economic stability under the new government. Labour highlighted that families are now saving nearly £1,000 annually on mortgages compared to July 2024, when the Conservative government left office. Property site Rightmove also reported that average first-time buyer mortgage payments are now about £100 less per month than a year ago.
Mounting Economic Pressures Test BoE’s Unity
Despite the likely rate cut, divisions within the Bank’s Monetary Policy Committee (MPC) continue to widen. Analysts expect a three-way vote split among the nine-member panel. External economists Alan Taylor and Swati Dhingra are reportedly pushing for a deeper half-point cut due to growing unemployment risks, while others, including chief economist Huw Pill and external member Catherine Mann, may vote to hold rates steady, warning of persistent inflation.
Most MPC members, including Governor Andrew Bailey, are expected to support the quarter-point cut.
Inflation, Unemployment, and Global Uncertainty Weigh on the UK
The economic picture remains mixed. Official figures show the economy shrank in both April and May, while unemployment continues to rise. Inflation hit 3.6% in June, well above the Bank’s 2% target.
Global uncertainty, including Donald Trump’s revived tariff war, and fiscal tightening at home, including potential tax hikes in Labour’s upcoming autumn budget, have further complicated the Bank’s policy decisions. Former MPC member Michael Saunders said the committee is navigating a complex environment where inflation, weak growth, and unemployment are pulling in opposite directions.
UK Business Concerns Mount Over Tax Burden
Business leaders have criticized the government’s recent tax increases, particularly hikes in employment taxes, warning they may result in job losses and higher consumer prices. Meanwhile, recent business surveys showed a slowdown in the services sector and a sharp drop in construction activity, underlining the fragility of the UK’s economic recovery.
Despite the uncertainty, mortgage holders have seen modest gains. Labour pointed to the current average two-year fixed mortgage rate of 4.52%, saving borrowers nearly £82 per month.
Treasury minister James Murray said: “Since we came into office, rates have been cut four times. That’s putting more pounds in the pockets of homeowners through cheaper mortgages.”
