The Bank of England was the first to cut interest rates by 25 basis points, and the market interprets this as a potential pause in the rate-cutting cycle.

The Bank of England announced on August 7 that it would lower the benchmark interest rate from 4.25% to 4%, marking the fifth rate cut since August 2024, in line with widespread market expectations.

However, behind this seemingly routine adjustment of monetary policy lies a profound divergence among the Central Bank members. During the decision-making process, due to difficulties in reaching a consensus, the Bank of England conducted two rounds of voting for the first time in its history before passing the resolution.

In the first round of voting, the committee unusually reached a tie with a result of 4:4:1. MPC external member Alan Taylor advocated for a more aggressive rate cut of 50 basis points;

Four committee members, including MPC Vice President Clare Lombardelli and Chief Economist Huw Pill, insisted on maintaining the interest rate at 4.25%; while the remaining four members, including Governor Andrew Bailey, supported the decision to cut the rate by 25 basis points to 4%.

After the second round of voting, the decision to cut interest rates was finally passed by a narrow margin of 5-4, reflecting the Central Bank's difficult trade-off in addressing economic slowdown and inflationary pressures.

It is worth noting that the Bank of England removed the previous phrase "the policy remains restrictive" from its policy statement, changing it to "with the interest rate reduction, the restrictiveness of monetary policy has decreased."

This change has also been interpreted by the market as a signal that the Central Bank may soon pause its rate-cutting cycle, and this signal directly tore up the check for Chancellor Rachel Reeves and Prime Minister Keir Starmer's hope to stimulate the economy through easing.

Meanwhile, the UK economy has been in a decline for two consecutive months, and the unemployment rate has risen to 4.7%, a four-year high. Inflation is at 3.6%, far exceeding the 2% target, with predictions that it may rise to 4% in September. Worse still, the Central Bank expects inflation to return to normal levels by the second quarter of 2027, which is three months later than previously estimated.

The market reaction has been relatively muted, with the GBP/USD exchange rate showing limited fluctuations after the announcement, reflecting that investors have fully digested the rate cut expectations. Analysts point out that the future policy path will heavily depend on data performance, especially inflation trends and changes in the labor market.

Most institutions expect that if the economy remains weak, the Bank of England may cut interest rates again in November, but the room for rate cuts in 2026 may be limited to 1-2 times, with the final interest rate likely to remain in the range of 3.25%-3.5%.

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