The Bank of England has lowered the Bank Rate by 0.25 percentage points to 4.5%, following a majority vote by the Monetary Policy Committee (MPC) at its latest meeting on 5 February 2025.

Seven members of the MPC voted in favour of the 0.25 percentage point cut, while two preferred a steeper reduction of 0.5 percentage points, to 4.25%. The majority decision reflects a cautious approach to monetary easing, balancing continued inflationary risks against signs of weakening economic activity.

INFLATIONARY PRESSURES AND ECONOMIC UNCERTAINTY

The majority of MPC members supported the rate cut on the basis that disinflation in domestic prices and wages had continued, despite expectations of a temporary uptick in consumer price index (CPI) inflation in the near term. While some members pointed to a looser labour market and weakening economic activity as reasons to expect further disinflation, there was broad agreement that the outlook remained uncertain, with global and domestic risks influencing inflationary trends.

Another perspective within the committee suggested that inflation persistence remained a concern, particularly given recent indicators of rising pay growth. Some members argued that weaker economic activity was more a reflection of constrained supply than growing slack in the economy. This outlook suggested that structural weaknesses, such as subdued productivity growth, could limit the pace of further disinflation, necessitating a measured and gradual withdrawal of monetary policy restrictions.

DISSENTING VIEWS CALL FOR A BIGGER CUT

Two members of the MPC, Swati Dhingra and Catherine L Mann, voted in favour of a larger 0.5 percentage point reduction to 4.25%, albeit for different reasons. One argued that with inflation continuing to decline, weak activity and falling labour demand would further reduce wage pressures and limit firms’ ability to raise prices.

A more decisive rate cut, in this view, would provide a clearer signal on the future path of financial conditions while acknowledging that monetary policy would need to remain restrictive for some time.

The other dissenting member believed that economic demand was already subdued enough to keep inflation sustainably at its 2% target in the medium term. Given this, they suggested that the Bank Rate should account for policy transmission effects and supply-side capacity over the longer term, making a more substantial cut appropriate.

A CAUTIOUS PATH AHEAD

Despite differing views on the pace of rate cuts, the committee agreed that monetary policy would need to remain restrictive until inflation risks were sufficiently contained. The MPC acknowledged that future rate decisions would depend on how inflation evolves in relation to both supply and demand conditions in the economy.

The policymakers also noted that uncertainties remain around economic growth and inflation persistence. If demand weakens further relative to supply, this could justify additional rate cuts to support the economy. Conversely, if supply remains constrained relative to demand, wage and price pressures could persist, requiring a more cautious approach to monetary easing.

The MPC confirmed that it would continue to assess the evolving economic data and determine the appropriate degree of monetary policy restriction at each meeting.

WELCOME RELIEF

Paul Noble, CEO of Chetwood Bank, said: “Today’s interest rate cut marks a significant milestone for the UK economy – while many expected cuts this year, the timing remained uncertain. For many, this decision will come as a welcome relief, renewing confidence and optimism for the months ahead.

“However, with the economy clearly underperforming and inflationary pressures still at play following the Budget, there remains some uncertainty around how quickly rates will fall from here. Savers should take this as a reminder that the window for securing the best rates in the savings market may be closing.

“Taking a proactive approach now can help ensure that savings continue to deliver strong returns before any further cuts take effect. With further reductions likely later this year, now’s the time for savers to review their options and make sure they’re set on the best possible path.”

SHOT IN THE ARM REQUIRED

Jeremy Leaf, north London estate agent and a former RICS residential chairman, commented: “The bank rate cut has been widely expected though its impact on the housing market is unlikely to be significant, at least immediately.

“However, confidence is vital to improving activity, not just when it comes to buying and selling houses but the wider economy, and even a small reduction is welcome.

“The housing market certainly needs a shot in the arm as many have been taking too long over decisions, although demand has certainly picked up since the stat of the year.

“On the plus side, in our offices we haven’t seen transactions failing or heavy renegotiations, with most sales proceeding – albeit sometimes painfully slowly.”

WHERE DO WE GO FROM HERE?

Rob Clifford, chief executive of Stonebridge, believes that the decision shows that the MPC felt the need to intervene to boost the economy.

He added: “With business confidence wavering, growth stalling, and a potential US trade war looming, the decision was clearly taken to prioritise growth over taming inflation at present.

“Here’s hoping today’s cut will jumpstart spending, encourage investment, and keep the momentum building for what is tipped to be a positive year for the UK’s housing market.

“The key question is: where do rates go from here? Markets are betting on three more cuts this year, though that is far from guaranteed.

“If inflation proves stubborn, we might see fewer cuts; yet if the economy continues to hibernate through the rest of winter, the MPC could be forced to act even more aggressively.

“While it’s hard to be certain, we remain confident that mortgage rates will continue to fall throughout 2025. That should leave borrowers in a much stronger position at the end of the year than they were at the start.

“MPC decisions and what they mean for mortgage rates can be baffling for the everyday borrower. As always, the value in advisers providing timely reminders to their customers that they have a trusted expert on-hand is invaluable.”