Bank of England cuts rates to 4% after narrow 5-4 vote

The Bank of England cut interest rates to 4% with a historically split 5-4 vote, signaling deep division within the Monetary Policy Committee and suggesting the rate-cutting cycle may be nearing its end. This reflects the MPC's struggle to balance a weakening jobs market against persistent inflation, which is now forecast to return to target only in Q2 2027. Consequently, British government bond yields rose, stocks fell, and sterling strengthened, as investors significantly trimmed expectations for further rate reductions.

Analysis

The Bank of England's decision to cut its key interest rate by 25 basis points to 4.0% was significantly overshadowed by the deep division within its Monetary Policy Committee. The 5-4 vote was historically close, requiring two rounds for the first time and revealing a strong hawkish dissent from four members, including the deputy governor for monetary policy and the chief economist. This split highlights the conflicting risks confronting the BoE: a weakening jobs market versus persistent inflation. Underscoring these inflationary concerns, the BoE revised its forecast for peak inflation upwards to 4% and delayed its projected return to the 2% target to the second quarter of 2027. The committee's forward guidance also shifted, notably removing the explicit statement that policy remains restrictive, which, combined with Governor Bailey's emphasis on a "gradual and careful" approach, signals that the easing cycle may be paused or even concluded. The market reaction confirmed this hawkish interpretation, with British government bond yields rising, stocks falling, and sterling strengthening as investors significantly scaled back expectations for further cuts, now fully pricing in only one additional 25bp reduction by February of next year.

Key Decisions for Investors

• Given the hawkish dissent and upwardly revised inflation forecasts, investors should anticipate potential for further increases in UK government bond yields, warranting a cautious stance on long-duration gilts.
• The market's repricing of the BoE's policy path has strengthened sterling; consider maintaining or initiating long GBP positions, particularly against currencies with more dovish central banks.
• The outlook of persistent inflation, higher-for-longer borrowing costs, and slow economic growth creates headwinds for UK equities, suggesting a defensive portfolio allocation may be prudent.
• The deep split on the MPC makes future policy decisions highly sensitive to incoming data, so investors must closely monitor UK inflation and employment figures for signals that could trigger market volatility.