Inflation predicament looms after Bank of England decreases interest rates twice
Bank of England Faces Tough Decision Amid Recession Risks and Persistent Inflation
The Bank of England (BoE) is grappling with a challenging economic landscape, marked by a weakening economy, rising recession risks, and persistent inflationary pressures. These concerns have led the BoE to cut its interest rate to 4% in August 2025, but with caution, given the complex trade-offs involved.
The UK economy has shown very sluggish growth, with GDP rising just 0.1% in Q2 2025 and expected to pick up modestly to 0.3% in Q3. Unemployment has crept up unexpectedly to a four-year high of 4.7% in May and could reach 5% next year, signaling labor market slack and subdued demand. The private sector employment weakness and rising spare capacity contribute to concerns about an "increased risk of recession" in the coming years, highlighted by BoE member Alan Taylor.
Inflation remains stubbornly above the BoE target of 2%, with headline inflation at 3.6% in June 2025 (above the BoE’s 3.4% expectation). Services inflation is particularly persistent at 4.7%, since many service prices are set annually, causing core inflation to remain elevated (3.7%). Rising food prices, driven partly by increased labor costs from employment taxes such as National Insurance Contributions, also pose an upward risk to inflation.
The BoE is balancing the need to support economic growth and employment through looser monetary policy against the risks of allowing inflation, especially core and services inflation, to remain too high. This creates complexity in policy decisions, reflecting an inflection point where the BoE has entered accommodative territory by cutting rates but remains cautious.
Higher national insurance taxes have increased labor costs for businesses, pushing up food prices and dampening hiring. This fiscal tightening effect complicates the BoE’s efforts to reignite growth and manage inflation simultaneously.
The BoE's Monetary Policy Committee (MPC) held a historic second vote on interest rates, leading to a tie within the committee, with an even split between members. Alan Taylor, a new member of the MPC, voted for a more aggressive 50bp interest rate cut, while another member, Huw Pill, voted for no change in interest rates and is more concerned about inflation remaining above target.
The Monetary Policy Report contained higher inflation forecasts compared to the prior quarter, adding to the BoE's concerns. The article does not mention any new concerns about the Monetary Policy Report or any specific actions taken by the Bank of England to address economic concerns.
If history were to repeat the 1970s, consumers might face both a recession and high inflation. The Bank of England is currently divided over whether to prioritize the risk of a recession or the potential return of high inflation, reflecting the delicate balance it must strike in its monetary policy decisions.
[1] Bank of England (2025). Monetary Policy Report. [2] Office for National Statistics (2025). GDP growth rate. [3] Office for National Statistics (2025). Unemployment rate.
The Bank of England (BoE) faces the challenging task of navigating the increasingly uncertain economic landscape, as it balances the need to stimulate growth while controlling persistent inflation and rising risks of recession. The complexity of these efforts is further compounded by higher national insurance taxes that push up labor costs for businesses, ultimately dampening hiring and exerting upward pressure on food prices.
In the midst of these challenges, the BoE must make difficult decisions regarding monetary policy, such as determining whether to prioritize mitigating the risk of a recession or the potential return of high inflation. The Monetary Policy Committee (MPC) recently held a historic second vote on interest rates, resulting in a tie and showcasing the Committee's divided opinion.
