While this decision is in line with market expectations, today's meeting was not without its challenges. For the first time in its history, the Monetary Policy Committee (MPC) had to hold two rounds of voting to decide on the level of interest rates. The first vote resulted in a delicate balance: four members in favor of a cut, four in favor of maintaining the status quo, and one, Alan Taylor, arguing for an even more significant reduction of 50bp. In the second round, Taylor joined the "25 camp" to confirm a quarter-point cut.

Governor Andrew Bailey and four of his colleagues ultimately opted for easing, believing that the disinflationary momentum remained credible despite everything. Among those in favor of maintaining the status quo, Clare Lombardelli—recently appointed deputy governor for monetary policy—diverged from the consensus for the first time, joined notably by Huw Pill, the institution's chief economist.

This vote highlights the tensions between the contrasting signals the central bank is receiving. On the one hand, the labor market is showing signs of weakness. But on the other, inflation is still too high. It is expected to remain between 3.5% and 4% for the rest of the year, according to the BoE's latest forecasts. However, several of its members have recently cited research papers suggesting that inflation tends to become entrenched once it exceeds 3.5% to 4%.

Source: Bank of England

In its statement, the Bank of England maintained its usual stance: any future rate cuts should be "gradual and cautious." But it also added that "the degree of policy restriction has declined as the policy rate has been reduced." This was perceived as a more hawkish stance. The market now anticipates a higher terminal rate, with only two rate cuts between now and next year and none this year.

This shift could complicate the task of the Starmer government, whose election promise to accelerate economic growth was based in part on sustained monetary easing. For Finance Minister Rachel Reeves, a premature halt to rate cuts would thwart her ambitions for stimulus.

Andrew Bailey described the decision as "finely balanced," insisting that rates were still on a downward path, but that any further cuts would now need to be carefully calibrated.

https://www.marketscreener.com/news/a-painful-rate-cut-for-the-bank-of-england-ce7c5edfdf81f72d