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The Bank of England (BoE) has cut interest rates to 4%, the fifth cut in a year, as the UK economy struggles amid high inflation and a stagnant jobs market.

The monetary policy committee (MPC) voted by a majority of 5–4 to reduce the Bank Rate by 0.25 percentage points, to 4%, rather than maintaining it at 4.25%.

Andrew Bailey, BoE governor, said: “We’ve cut interest rates today, but it was a finely balanced decision. Interest rates are still on a downward path, but any future rate cuts will need to be made gradually and carefully.”

The unprecedented split saw governor Bailey force the MPC to vote twice after a deadlocked initial vote. It was the first time in MPC history that the committee had to hold two rate votes.

Five members of its rate-setting committee – Bailey, deputy governor Sarah Breeden, Swati Dhingra, deputy governor Dave Ramsden and Alan Taylor – voted to reduce interest rates by 0.25 percentage points, to 4%.

Taylor wanted a deeper cut of half a percentage point, which would have cut rates to 3.75%.

Megan Greene, deputy governor Clare Lombardelli, Catherine L Mann and chief economist Huw Pill voted to maintain interest rates at 4.25%.

The 25 basis point reduction is expected to ease pressure on mortgage holders and homebuyers, potentially unlocking more affordable borrowing options.

This move brings borrowing costs back to levels not seen since March 2023, the lowest in two years.

Financial markets had largely anticipated the cut, with analysts forecasting at least one more reduction later this year, likely in November.

Chancellor Rachel Reeves said: “This fifth interest rate cut since the election is welcome news, helping bring down the cost of mortgages and loans for families and businesses.

“The stability we have brought to the public finances through our Plan for Change has helped make this possible and helped us become the fastest growing economy in the G7 in the first quarter of this year. We’re locking in this growth in the long run by investing over £113bn in infrastructure, securing three major trade deals and embracing the technologies of the future – to drive up wages and improve living standards across the UK."

Official data from the Office for National Statistics (ONS) revealed that UK unemployment had increased to 4.7% for the three months to May, its highest level in four years. Meanwhile, average earnings growth, excluding bonuses, slowed to 5%, the weakest growth in almost three years.

The jobless rate was slightly higher, wage growth has weakened, and redundancies have been elevated, he said.

BoE governor Andrew Bailey last month said the Bank would be ready to cut rates further if the labour market showed signs of continued weakening.

The UK economy also contracted in April and May, adding pressure on policymakers to continue easing borrowing costs.

Sanjay Raja, senior UK economist for Deutsche Bank, said the economy has been “weaker than the MPC anticipated” since it last published a Monetary Policy Report in May.

The BoE expects prices to continue to rise with inflation expected to peak in September even as it agreed to cut interest rates to 4%.

The BoE said inflation had increased in recent months owing to rising energy and food prices and high wage growth and was expected to reach a high point next month.

The Committee said: “CPI inflation is forecast to increase slightly further to peak at 4% in September. Inflation is expected to fall back thereafter towards the 2% target, although the Committee remains alert to the risk that this temporary increase in inflation could put additional upward pressure on the wage and price-setting process.

“Overall, the MPC judges that the upside risks around medium-term inflationary pressures have moved slightly higher since May.”

Victor Trokoudes, founder and CEO of smart money app Plum, said: “Today’s decision by the BoE to cut the base rate by 0.25 percentage points to 4% had been broadly expected. The previous vote had seen a 6-3 split, so there was already significant demand among the committee for a rate reduction.”

Trokoudes added: “This decision may come as a surprise to some, since the latest inflation reading was 3.6%, well ahead of the central bank’s target of 2%, as well as the Bank’s focus on a ‘gradual and careful approach’ to decreasing rates. What will have concerned the central bank most about the inflation reading was food prices being a key driver of the rise.

“There are still large levels of concern about how much impact US tariffs will have on the global economy, even though the UK appears to be among the countries better positioned to navigate this."

What the rate cut means for consumers

For borrowers, the BoE's rate cut is a welcome development, especially for those with variable-rate mortgages or tracker loans. A lower base rate means reduced repayments for those looking to borrow. However, many re-mortgagers will likely face new, higher rates than those they were previously on, despite the reduction in the base rate.

According to Rightmove (RMV.L), the typical first-time buyer's mortgage payment is now nearly £100 less per month compared to a year ago. Yet, despite this, the reduction in mortgage rates has largely stalled in recent months, with the quoted interest rate on a two-year fixed mortgage (LTV 75%) rising from 4.19% in May to 4.32% in June.

Alice Haine, personal finance analyst at Bestinvest by Evelyn Partners, said: “First-time buyers, homeowners with large mortgages due for refinancing, and heavily indebted borrowers are likely to feel the greatest relief from easing borrowing costs. Savers, on the other hand, may be disappointed by the prospect of lower returns on their savings.

“While the worst of the cost of living crisis is now behind us, consumers have been hit by a barrage of bill hikes in recent months. The BoE suggests the recent jump in prices is temporary with inflation expected to peak at 4% in September before easing back again – but consumers should not breathe a sigh of relief just yet. US President Donald Trump’s ongoing tariff war and simmering geopolitical tensions continue to pose risks to global growth and price stability."

Mark Hicks, head of active savings at Hargreaves Lansdown, advised savers to look for the best rates, which are often offered by smaller banks, building societies, and fintechs.

He said: “At the moment, unusually, the most competitive fixed terms currently have lower headline rates than the most competitive easy-access deals… We think easy-access rates could fall towards 4%. Fixed-rate deals, however, could remain relatively stable, eventually offering higher rates than easy-access products.”

For those with savings, Hicks recommended locking in higher rates for a longer term if they don’t need immediate access to their funds.

Markets see rates drop to 3.5% next year

Looking ahead, markets expect the base rate to fall further, with projections suggesting a drop to 3.5% by spring 2026. Further cuts could come in November and February.

Laith Khalaf, head of investment analysis at AJ Bell, said: “If it plays out this way, it would surely go down as the tidiest rate-cutting cycle on record, especially in light of what’s going on in the world outside of Threadneedle Street.”

However, Khalaf cautioned that the outlook remains uncertain. “The effects of tariffs on the global economy, the unpredictable prospects for energy prices, and a tricky autumn budget in the UK are just three factors that will weigh on the direction of interest rates from here.”

In the US, the Federal Reserve has defied calls from Trump for an interest rate cut by leaving it unchanged.

The decision, which was widely expected, left the Fed's key lending rate between 4.25% and 4.5%, where it has stood since December.

In Europe, the European Central Bank (ECB) has held its benchmark interest rate steady at 2%.

The decision came as no surprise after ECB president Christine Lagarde indicated last month that the central bank had “nearly concluded” its latest rate-cutting cycle.

Central banks typically lower interest rates when the economy is struggling and raises them if the pace of price rises starts increasing too quickly.

The Bank of England's next meeting will take place on 18 September.