The Bank of England is widely expected to cut interest rates on Thursday, marking a potential turning point in the UK’s monetary policy after a prolonged period of tightening aimed at curbing inflation. If confirmed, it would be the Bank’s first rate reduction since March 2020, as signs of a slowing economy and easing price pressures mount.
Markets brace for a 25-basis-point cut
Economists and investors are anticipating a 25-basis-point cut from the current rate of 5.25%, with the Monetary Policy Committee (MPC) expected to vote in favour of the move by a narrow margin. Market pricing on Tuesday suggested a roughly 70% chance of a cut, as softening wage growth and declining consumer spending have shifted the Bank’s policy outlook.
Governor Andrew Bailey has recently signalled that while inflation is “much closer” to target, the Bank remains cautious. June inflation fell to 2%, hitting the official target for the first time in three years, although services inflation remains stubbornly high — a concern for some hawkish members of the MPC.
Economic slowdown drives policy shift
Recent data suggest the UK economy is losing momentum. Retail sales have weakened, business investment remains sluggish, and consumer confidence has dipped. Mortgage approvals and housing activity have also slowed, indicating the impact of high borrowing costs over the past two years.
While the BoE has maintained a higher-for-longer stance since mid-2023, the latest economic indicators appear to have tipped the balance. Growth forecasts for the second half of 2025 have been revised downward by several analysts, strengthening the case for a gradual easing cycle.
Political backdrop adds complexity
Thursday’s expected rate cut comes just weeks after the general election, which brought a new Labour government to power under Keir Starmer. While the Bank of England operates independently, the political context could increase scrutiny of its decisions, particularly as the new government seeks to revive growth without fuelling inflation.
Treasury officials are likely to welcome the move, as lower rates could help ease pressures on households and small businesses. However, some market participants remain wary of loosening too soon, especially if energy prices or global supply shocks reignite inflationary risks.
Sterling and gilts react ahead of decision
The pound has slipped slightly against the dollar and euro ahead of the rate announcement, reflecting expectations of easing monetary policy. UK government bond yields have also declined in recent sessions, with the 10-year gilt yield falling below 3.8% — its lowest in over three months.
Investors will be watching closely for forward guidance from Bailey and the MPC, particularly signals about the pace of any further cuts. Some analysts expect a second rate reduction before the end of the year, while others caution that the Bank may pause again if inflation shows signs of reacceleration.
Eyes on the global context
The BoE’s decision also comes as other central banks, including the European Central Bank and the US Federal Reserve, are weighing similar moves. With inflation cooling globally but remaining unpredictable, coordinated easing could become a theme in late 2025.
Thursday’s announcement is due at 12:00 BST, with a press conference scheduled shortly after.
REFH – Newshub, 7 August 2025
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