The Bank of England is expected to deliver its fifth rate cut in a year this week, but divisions among policymakers reflect a growing dilemma: how to balance sticky inflation with rising unemployment and stagnant growth.
The Bank of England is widely expected to cut interest rates for the fifth time in a year today (Thursday), as rising unemployment and slowing growth weigh heavily on the UK economy.
Economists and market participants anticipate a quarter-point reduction, bringing the base rate down to 4%—a move that would further unwind the Bank’s most aggressive monetary tightening cycle in over a decade.
While financial markets have priced in the cut with near-certainty, the decision is far from straightforward. The nine-member Monetary Policy Committee (MPC) is facing growing internal disagreement, with signs pointing to a rare three-way split.
External members such as Swati Dhingra and Alan Taylor are thought to favor a deeper, half-point cut to offset rising job losses and weak consumer demand. Others, including chief economist Huw Pill and external economist Catherine Mann, are expected to argue for holding rates steady amid persistent inflationary pressures.
Governor Andrew Bailey and most of the committee are likely to support a 25-basis-point reduction.
Yet the internal divide underscores the complexity of the current economic environment: unemployment is climbing, growth is stagnant, and inflation—while down from its peak—remains uncomfortably above the Bank’s 2% target, with June’s reading at 3.6%.
The economic signals present a challenge for policymakers.
Unemployment rose to 4.7% in the three months to May, the highest level in four years, while the economy contracted in both April and May. Average earnings growth slowed to 5%, the weakest pace in nearly three years. Business sentiment surveys suggest the service sector is softening, and construction activity has fallen sharply.
At the same time, inflationary pressures are proving stubborn. Food prices remain elevated, and core inflation has not cooled as quickly as hoped.
The risk, as some MPC members argue, is that rate cuts could reignite inflation, particularly with geopolitical uncertainty and global supply chain shifts adding further complexity.
Michael Saunders, a former MPC member and now economist at Oxford Economics, described the current situation as “one of the more difficult policy environments in recent memory.”
According to Saunders, “You have weak growth, rising unemployment and inflation well above target. Those signals go in opposite directions.”
The expected cut would ease pressure on households and businesses, offering modest relief to mortgage holders.
According to Rightmove, average monthly payments for first-time buyers have fallen by nearly £100 compared to last year, with two-year fixed rates dropping to around 4.52%. Labour has highlighted this trend to claim credit for improved economic stability since taking office last summer.
Chancellor Rachel Reeves, whose first autumn budget faces growing scrutiny, will likely welcome the Bank’s move as an endorsement of Labour’s fiscal management.
However, the broader context is less favorable. Critics point to her decision to raise employer national insurance contributions, warning it may dampen hiring and strain business margins.
Meanwhile, trade risks linked to the Trump administration’s tariff policies continue to loom large. The reallocation of cheap Chinese exports from the US to Europe could lower UK import prices, potentially easing inflation.
But the broader uncertainty is deterring investment and complicating the Bank’s outlook.
While a 25-basis-point cut appears baked in, the path beyond Thursday is less certain. The MPC is expected to signal that further cuts are likely, but contingent on inflation trends and labor market developments.
Sanjay Raja, senior economist at Deutsche Bank, said the committee is “between a rock and a hard place,” with conflicting signals making a clear forward path elusive.
Thursday’s rate cut will be accompanied by updated economic forecasts from the Bank. These revisions will be closely watched by markets for signs of how far and how fast the MPC believes it can continue to loosen monetary policy without jeopardizing its inflation target.
For UK businesses and households, the message is clear: borrowing costs are likely to ease, but only gradually, and not without contention.
The Bank remains cautious, navigating a narrow corridor between reviving growth and preventing a resurgence of inflation.