The Bank of England cut interest rates by 25 basis points on Thursday, even though rate-setters expect to see a significant rise in inflation over the coming year. 

Seven members of the Bank’s Monetary Policy Committee (MPC) backed the decision, while two – Swati Dhingra and Catherine Mann – voted for a larger 50 basis point cut. 

The decision means that the benchmark Bank Rate stands at 4.50 per cent, down from a peak of 5.25 per cent.

While investors had expected the Bank to cut rates, many thought that at least one member of the MPC, likely Mann, would have voted to hold rates steady. 

Andrew Bailey, the Bank’s Governor, said: “We’ll be monitoring the UK economy and global developments very closely and taking a gradual and careful approach to reducing rates further,” 

The vote split suggests the MPC is increasingly concerned with weakness in the economy, meaning they will look through the anticipated resurgence in inflation. 

Inflation will rise to a peak of 3.7 per cent in the third quarter of this year, according to the Bank’s latest forecasts, a significant upgrade on its previous assessment of 2.8 per cent. 

The increase will largely be driven by higher global energy prices, which have surged since November. Regulated prices like water bills and bus fares will also play a role, the forecasts suggest. 

However, the MPC continued to predict that the Budget tax hikes would only have a limited pass-through to consumer prices. 

Bank of England warns on inflation

Although the headline rate will rise, MPC members noted that progress on underlying inflation has continued in recent months. 

Services inflation has fallen further than expected, while wage growth is expected to “slow significantly” by the end of 2025, the MPC said. 

It predicted that the pickup in headline inflation would “not lead to additional second-round effects” which would derail progress on underlying inflation. 

Inflation will eventually return to target in the final quarter of 2027, two quarters later than the Bank predicted in November.