Andrew Bailey, Governor of the Bank of England. Image courtesy of the Bank of England.
The British Pound rises against the Euro and Dollar as an initial response to the August policy decision.
The Bank cut interest rates 25 basis points, but the decision was not nearly as straightforward as the market anticipated, as 4 members of the Monetary Policy Committee (MPC) voted to keep interest rates unchanged.
One member voted to slash interest rates by 50bp (Alan Taylor), but that he was not joined by fellow dove Swati Dhingra suggests there might not be as much appetite to accelerate the process that was speculated in the run-up to the decision.
The vote split was always going to lay down the initial markers for a market that expected a cut but was unsure of what comes next. That the MPC just scraped a cut through the door draws question marks on a follow-up cut in November.
So close was the decision that a second vote was called for to break the tie between the holders and the cutters, with Taylor flipping his vote from 50bp to get a 25bp move across the line.
"BoE vote was recast after a split! I don't think that's ever happened," says Viraj Patel, a strategist at Vanda Research. "Taylor voted originally to cut 50 and then went 25. But it was finely balanced - shows that this was a hawkish 25bps cut. Most likely rules out September cut unless substantial miss in jobs/CPI in August."
The vote dynamics reveal a strong conviction on the MPC that inflation is too much of a risk to warrant cutting interest rates. The market is recalibrating its expectations, with rising short-term bond yields suggesting the scope for further cuts has diminished.
"The Bank of England has struck a hawkish surprise. In an extraordinary turn of events, the vote on rates was unexpectedly gridlocked, and an unprecedented second round of voting was required in order to reach a majority decision - a first since the inception of the MPC in 1997. Market participants had braced for no more than a couple of dissenters in favour of no change, and it's safe to say that the razor-thin 5-4 vote has turned a few heads," says Matthew Ryan, Head of Market Strategy at Ebury.
Rising short-term bond yields are pulling the Pound higher: The Pound to Euro exchange rate is 0.43% higher on the day at the time of writing at 1.15. The Pound to Dollar exchange rate is half a per cent higher at 1.3421.
Underscoring the more cautious approach to the interest rate path on the MPC is the view that slightly higher upside risks to medium-term inflation have evolved since May.
The hawkish minority (4 members who voted for a hold) are concerned about inflation persistence, driven by food and energy costs, and elevated inflation expectations. This outweighs the Bank's acknowledgement that the labour market is weakening, which would typically be associated with lower inflation down the line.
What is clear is that rising food prices are becoming an issue. In the post-decision press conference, Governor Andrew Bailey said the Bank was concerned that higher food and energy prices would lead to secondary round inflation effects that prompt higher wages and price setting at British companies.
The Bank notes that food prices have a particularly direct influence on how people and businesses perceive the direction in inflation. After all, we are more aware of our weekly shopping basket's behaviour than most other elements that make up our sense of inflation.
The Bank MPR warns that even temporary spikes in food prices may be "salient" to households, influencing their inflation expectations more than warranted by fundamentals.
Food & non-alcoholic beverages inflation rose 4.5% year-on-year in June 2025, the highest since February 2024. Retail food inflation for 2025 is expected to average 4.0%, up from a previous estimate of 3.4%, and could peak at 5.1% in late summer, according to updated forecasts from IGD.
The quarterly Monetary Policy Report reveals the important economic forecasts to which the Bank sets its policy against, and what is clear is that inflation is seen as more as a problem than previously thought.
For instance, headline CPI Inflation is now expected to peak slightly higher than anticipated back in May's forecast, at 4.0% in September, due to upside surprises in energy, food, and administered prices.
Medium-term inflation risks are judged to be slightly higher than in May, particularly due to concerns that temporary inflation spikes might influence wage and price-setting behaviour.
Underlying services inflation is moderating, but more slowly than projected in May. Pay growth has eased more than expected, yet remains elevated—a key determinant of inflation persistence.
Looking ahead, the MPC maintains that policy is not on a preset path and future decisions will depend on the pace of disinflation and incoming data, and a "gradual and careful" approach to easing remains the Committee’s stated stance.