In a move that has divided economic experts, the Bank of England has lowered its base rate to 3.75%. The decision, finalized by a razor-thin 5-4 vote within the Monetary Policy Committee, reflects a delicate balancing act. Policymakers are attempting to support a struggling economy without letting inflation off the leash, a task that Governor Andrew Bailey admits is becoming increasingly difficult.
The rate cut, the sixth since the Labour government took office, comes as official data shows inflation cooling to 3.2%. While this is a significant improvement from the peaks of previous years, it remains above the government’s strict 2% target. The “doves” on the committee argued that the risk of a recession outweighs the risk of inflation, pointing to weak consumer spending and a cooling labor market.
Conversely, the “hawks”—including Chief Economist Clare Lombardelli—voted to keep rates on hold. They pointed to stubborn wage growth and high service sector inflation as evidence that price pressures are now entrenched in the economy. They warned that cutting rates too quickly could undo the hard-won progress made over the last two years, potentially requiring a reversal of policy later on.
Chancellor Rachel Reeves praised the decision, positioning it as a vindication of her government’s fiscal strategies. She noted that the reduction would help alleviate the cost-of-living crisis for millions of households. However, critics, including union leaders, argue that a single quarter-point cut is insufficient to reverse the damage caused by months of stagnant demand.
Looking ahead, the economic forecast remains murky. GDP is expected to be flat for the remainder of the year, and the International Monetary Fund has warned that UK consumers may face higher inflation than their G7 counterparts. As the new year approaches, all eyes will be on wage settlements and spending data to see if this gamble on growth pays off.