It’s time the Bank of England was bolder in its rate-cutting

The latest cut in interest is in – but the Bank of England’s rate-setters are sharply divided.

As the City expected, a quarter point was shaved from base rates, to 4.25 per cent, continuing the cautious approach favoured by the majority on the Bank’s Monetary Policy Committee (MPC).

However, the MPC sprang a surprise with the vote. At 5-4, it was on a knife edge. Two of the dissenters, Swati Dhingra and Alan Taylor, both external appointees, favoured a bigger downward move of 0.5 per cent. By contrast, the other pair, the Bank’s chief economists Huw Pill and the hawkish Catherine Mann, wanted no change.

It is no bad thing to have heterodox thinking on a body of this importance. That different options are held, expressed and robustly discussed is greatly preferred over the adoption of a cosy consensus.

However, this level of division reflects the fact that the MPC is trying to navigate through a squall without the benefit of a decent compass.

It lacks data on how Donald Trump’s trade wars will affect the UK, and hasn’t been briefed on the “full and comprehensive” US trade deal negotiated by Keir Starmer.

It thinks inflation, which stands at 2.6 per cent and has been coming in below forecasts, could go either way as a result of the Trump-created global eco-chaos. Its current forecast is that a mini-spike, topping out at 3.5 per cent, is still coming. However, the Consumer Prices Index (CPI) is then expected to fall back towards the 2 per cent target later in the year. Trouble is, the current uncertainty makes such forecasting even less reliable than usual.

Monetary policy nonetheless remains restrictive, even after the cut to 4.25 per cent, and the Bank once again stressed the need for a “cautious” and “gradual” approach to cutting rates despite the economy’s struggles. The minutes highlighted that most of the five who voted for a 0.25 per cent cut felt the decision was “finely balanced” between the reduction they served up or holding at 4.5 per cent.

The markets would have got a nasty shock had the vote gone the other way. Mortgage rates have come down in anticipation of cuts, with a number of lenders prepared to offer deals below 4 per cent to customers able to pay chunky deposits. You’ll note that this is below base rates. That is because the interest rate swaps market, which is where lenders find the financing for their fixed-rate products, thinks rates will fall further and will be lower over the medium to long term. Those deals would likely have evaporated had the Bank signalled a still more cautious approach.

The calls for it to shed that and take a more aggressive move downwards are only going to grow louder. Martin McTague, chair of the Federation of Small Businesses, for example, warned that his members “currently face significant barriers to accessing affordable finance, with many applications being rejected or only offered at high rates.

“Small firms could drive growth if given the right conditions – but now they are battling a combination of low confidence, late payments, and tax compliance costs,” he added. Further cuts cannot come soon enough for this group. But it also requires lenders to play ball and pass them on.

“With so many moving parts in the global and domestic outlook, the committee may maintain a cautious stance. But with inflation risks increasingly tilting to the downside, a faster pace of rate cuts may become more palatable to a growing number of members,” said Alpesh Paleja, the CBI’s deputy chief economist, said.

While it would certainly be more palatable to business groups’ members, the MPC’s minutes don’t really suggest that’s happening yet, beyond the consistently dovish Dhingra and Taylor.

The economy could surely use the help. The MPC has admitted as much. The first quarter of the year surprised on the upside, but it is of the view that if you take out the boost to manufacturing, driven by the desire to get goods across the Atlantic ahead of Trump’s tariffs, it would have been zero.

Not much is expected of the current three-month quarter. Growth is expected to cough and splutter its way to 0.1 per cent. High interest rates are adding to the hurdles UK plc faces. Rachel Reeves’s decision to increase taxes on business has also played a role, as has rock-bottom business and consumer confidence. It’s not all about Trump (even though he probably thinks it is).

Notwithstanding all this, a pickup in the second half is still expected, and the Bank even upgraded its growth forecast to 1 per cent for the year. However, it has downgraded 2026 to 1.25 per cent from 1.5 per cent.

It isn’t at all surprising to see such swings and roundabouts in the forecasts, but the overall outlook is hardly cheery. I think the case for a more aggressive approach to reducing rates is growing stronger. However, I’m not sure the committee is willing to go there – yet.