A cut in the cost of borrowing today helped deliver what is likely to be a hat-trick of positive announcements for the UK Labour government.
As expected, the Bank of England’s monetary policy committee shaved 25 basis points off the base rate, bringing it down from 4.5% to 4.25%, easing cost pressures on businesses and households. It is the fourth rate cut in 12 months.
There was an unusual three-way split in the vote with a 5-4 majority in favour of a quarter point cut, two members wanting a half point cut to 4% and two preferring to maintain the rate at 4.5%.
The bank noted that underlying UK GDP growth is judged to have slowed since the middle of 2024, and the labour market has continued to loosen. It said progress on controlling inflaiton in domestic price and wage pressures is generally continuing.
Wholesale energy prices have fallen back since the February Report, said the bank, though previous increases in energy prices are still likely to drive up CPI inflation from April onwards, to 3.5% for 2025 Q3. Inflation is expected to fall back thereafter. Measures of household inflation expectations have risen recently.
Today’s cut came after the government’s National Wealth Fund announced a £600m loan to ScottishPower parent Iberdrola as part of a £1.35bn package of support for a huge renewal of the electricity grid. This is likely to create hundreds of jobs in the supply chain. Later today the government is expected to confirm it has reached an agreement with the US on tariffs.
There was some disappointment that the Bank of England did not opt for a bigger cut. Managing Director of Aurora Capital, George Holmes, said it “may be a step in the right direction, but it doesn’t go far enough. Services activity is shrinking, global trade tensions are rising, and small businesses are holding back.
“This small cut won’t be enough to give businesses the confidence they need to move forward. What was needed today was a clear, confident signal that growth is the priority.”
However, some believe it will help stimulate deal activity. Hamish Martin, partner at LAVA Advisory Partners, said: “We could well see a noticeable shift in M&A appetite, especially from private equity, who have been slightly more cautious of late with such comparatively high rates.
“Lower borrowing costs open the door for more leveraged deals, and we’re already seeing increased interest in lower-mid-market assets that might have been priced out just a few months ago.
“For founders and business owners considering an exit, this could mark the start of a more favourable window, especially as buyers start to move more decisively and have lower-cost capital at their disposal.”
Chancellor Rachel Reeves gave her usual statement about “putting more money in the pockets of working people through our Plan for Change.”
Luke Bartholomew, deputy chief economist, at Aberdeen said: “No surprises in the Bank’s decision to cut interest rates by 25bps. But the Monetary Policy Committee is clearly very divided on how policy should respond to the many shocks currently hitting the economy, with a three-way split in the voting pattern.
“This is highly unusual and will make it hard for the Bank to send a clear signal to the market about the likely path of policy.
“But with the Bank maintaining its guidance that further cuts will be “gradual and careful”, the chance of another cut in June probably have fallen significantly.
“We still think the Bank will cut rates at least twice more later this year, but much like the Fed’s message yesterday, UK policy makers will want to see more data on how tariffs and domestic tax increases are being digested by the economy before moving decisively.
“Bailey may face questions about the UK-US trade deal, but its impact on monetary policy is likely to be relatively modest, even if it may help to further support risk sentiment.”
Alpesh Paleja, deputy chief economist at the CBI, said: “Today’s cut to interest rates was widely anticipated, underscoring the Monetary Policy Committee’s continued preference for a gradual loosening of monetary policy.
“The big question now is whether this gradualism will persist…heightened uncertainty could keep the MPC from easing off on the brakes too much.”
… more follows
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