The Bank of England's Monetary Policy Committee voted seven to two in February 2025 to cut the base rate from 4.75% to 4.5%, delivering the third consecutive reduction since the easing cycle began in August 2024. The decision reflected growing conviction among policymakers that inflation had returned durably to the 2% target after one of the most challenging inflationary episodes in four decades.
A Long-Awaited Pivot
For much of 2023 and 2024, the MPC resisted calls to loosen policy, keeping rates at a 16-year high of 5.25% as stubborn services inflation and strong wage growth complicated the picture. The pivot that many economists had anticipated arrived later than financial markets had initially priced, but it has gathered pace in recent months.
Headline CPI inflation fell to 2.5% in December 2024, broadly in line with the Bank's projections. Services inflation, which had proved the most persistent component of the inflationary episode, eased to around 4.4%. Both figures represent a substantial improvement from the peak of 11.1% reached in October 2022, when energy price shocks and global supply chain disruption combined to produce the worst inflationary environment in a generation.
London's Canary Wharf financial district. Photo: Simone Hutsch / Unsplash
"The stance of monetary policy remains restrictive even after today's decision, and the Committee will continue to assess whether further adjustments are appropriate as the economic outlook evolves." - MPC Statement, February 2025
Services Inflation: The Final Hurdle
Despite the overall improvement, the MPC has signalled continuing caution about the services sector. Services inflation remains well above levels consistent with the 2% target, reflecting the lagged effects of the tight labour market that characterised 2023. The unemployment rate, while rising modestly to around 4.4%, remains historically low, and nominal wage growth of roughly 5.5% continues to feed into the prices of labour-intensive services.
Two MPC members, Swati Dhingra and one other external member, voted for a larger 50 basis point cut, arguing that the risks had shifted decisively towards a sharper-than-expected slowdown in economic activity. The majority judged that a more gradual approach remained appropriate given the residual uncertainty.
What Markets Expect
Interest rate futures markets price in two or three further 25 basis point reductions by the end of 2025, which would bring Bank Rate to around 3.75% to 4%. That compares to the six cuts that were anticipated at the start of 2024, before the stickiness of domestic inflationary pressures became apparent.
Governor Andrew Bailey has emphasised repeatedly that the MPC will not commit to a predetermined path and will remain data-dependent at each meeting. The next decision is scheduled for May 2025, when updated forecasts from the Monetary Policy Report will inform the Committee's judgement.
Sources
Bank of England, "Monetary Policy Summary and minutes of the Monetary Policy Committee meeting ending 5 February 2025." bankofengland.co.uk, February 2025.
Office for National Statistics, "Consumer price inflation, UK: December 2024." ons.gov.uk, January 2025.
Office for National Statistics, "Labour market overview, UK: January 2025." ons.gov.uk, January 2025.
HM Treasury, "Forecasts for the UK Economy: February 2025." gov.uk, February 2025.
