Last week, the Bank of England voted 5-4 in favour of reducing the Bank Rate by 0.25%, bringing it to 4% – its lowest level in two years.
But the decision was fraught with uncertainty. For the first time since 1997, the Monetary Policy Committee (MPC) was forced to hold a revote after failing to secure a majority in the first round. Four members supported a 25bps cut, four preferred to hold at 4.25%, and one pushed for a larger 0.5% reduction.
It’s a sign of the challenges the central bank is grappling with, and it now finds itself at something of an inflection point. Inflation remains stubbornly above the Bank’s 2% target, economic growth is sluggish, and the labour market shows signs of softening.
Policymakers are therefore walking a delicate line between supporting growth and keeping inflation under control. This blog will explore why that is.
Inflation continues to pose challenges
The MPC’s primary mandate is maintaining monetary and financial stability, and that means keeping inflation under control. The target is 2%, a figure seen as sustainable and supportive of long-term growth.
Despite the rapid rate-hiking cycle between 2021 and 2023, inflation continues to exceed that target. After briefly dipping below the 2% target in October 2024, it has rebounded to 3.6% in June 2025 (up from 3.4% in the month before). Moreover, forecasts now suggest that inflation will peak at 4% in September due to higher food and energy costs.
This suggests that the Bank of England’s current approach isn’t doing enough to limit inflation, but its only tool to dampen it is to raise the base rate again.
Economic growth: The headlines are better than reality
However, the Bank of England must also balance inflation against economic growth. And, despite being central to the Labour government’s agenda, it remains too fragile to allow the Bank of England to hike the base rate again to limit price rises.
Between April and June 2025, the UK economy expanded by 0.3%, beating market expectations. This puts the UK on track to grow faster than anywhere else in the G7 in the first half of the year (pending data from Japan).
Beneath the headline figure, the economy experienced slower growth in April and May, with June’s 0.4% increase helping to avoid three consecutive months of contraction. That growth was largely driven by the services sector, while households are feeling the pressure of rising bills and businesses are managing higher national insurance and minimum wage costs.
Normally, a weaker inflation environment might encourage rate cuts, but with inflation still high, an aggressive reduction risks ushering in a period of stagflation, where growth stagnates while prices rise.
Pressure is building in the labour market
Adding to the pressure is a softening labour market. Payrolls fell in July, annual wage growth slowed in Q2, and hiring intentions have dropped to record lows. At first glance, slower wage growth may seem beneficial for the Bank of England, as it could relieve some of the inflationary pressures that have persisted despite earlier rate hikes.
However, this is only part of the story. A weakening labour market can also signal softer consumer spending and lower demand in the economy, which could slow economic growth more than expected.
A cautious approach is likely to remain in place
What’s clear is that the Bank of England’s MPC have a very complicated choice when it next meets on the 18th of September – commit to a more aggressive rate-cutting agenda and risk entrenching inflation, or hold rates steady and risk further stifling a fragile economy.
So, which approach is it likely to take?
According to the Governor of the Bank of England, the path for interest rates remains downwards, but it is “a bit more uncertain”. Following the rate cut on the 7th of August, the MPC said that medium-term inflationary risks “moved slightly higher” in recent months.
As such, economists largely agree that there will be just one further cut this year – likely in November. While many previously forecast two further cuts, the voting split at August’s meeting indicates that the more cautious members of the MPC are in the majority.
What does this mean for the property and lending markets?
For the property and lending markets, any action taken on Threadneedle Street is important. However, the impact of the latest cut will be relatively modest.
Mortgage rates are starting to come down, offering some relief to borrowers, but the pace of reductions is not rapid enough to spark a real boom in activity. At the same time, higher stamp duty costs continue to weigh on investor demand, keeping activity somewhat subdued.
For brokers, therefore, finding the right finance for their clients will be key. While rates remain elevated, investors need more than a low interest rate – they need flexibility, tailored support and financial solutions that allow them to act with confidence amid uncertainty.
RAW Capital Partners is committed to providing these qualities – get in touch to find out how we can help with your next case.