The path of the Bank of England's interest rate cut is unclear: internal disputes intensify, and the market is cautiously watching

Andrew Bailey, governor of the Bank of England (BoE), told a House of Commons Treasury Committee hearing that the market had come to understand its signal that interest rates would be "gradually lowered over time", but the timing and pace of future rate cuts remained uncertain. At the same time, divisions within the Monetary Policy Committee (MPC) have become increasingly prominent, with inflationary pressures and rising global bond yields adding complexity to policymaking.

Interest rate policy: Uncertainty under gradual rate cuts

Mr. Bailey reiterated at the hearing that the Bank of England's base rate would continue to be "gradually lowered", but the exact pace was unclear. "There is now considerable doubt as to when and at what pace we will move further," he said, continuing his stance after the August rate cut.

In August 2025, the Bank of England narrowly cut the base rate from 4.25% to 4% by a 5-4 margin, the fifth 25 basis point cut since August 2024. However, divisions within the MPC led to a rare two-round vote for the first time, highlighting the tension in policymaking.

Financial marekt now expects another 25 basis point cut before the end of the year to be just a one-in-three chance, according to London Stock Exchange Group (LSEG) data, and has fully factored in the expectation that it will not cut rates again until April 2026. By contrast, a Reuters poll of economists shows that the market generally expects the central bank to cut rates again by the end of 2025 and again in Quarter 1 in 2026. This divergence between the market and central bank expectations reflects the impact of inflationary pressures and economic uncertainty on the path of interest rates.

Inflationary pressures and committee disagreements

Inflation in the UK recently rose to 3.8 per cent, close to double the central bank's 2 per cent target and the highest in the Group of Seven leading industrialised nations. The Bank of England expects inflation to hit 4 per cent in September and not return to target until the second quarter of 2027. This persistent inflationary pressure has exacerbated divisions within the MPC.

hawkish stance: Vice President Clare Lombardelli and External Commissioners Megan Greene are cautious about further rate cuts. In a written note, Lombardelli said current policy restrictions may not be sufficient to ensure a sustainable return to 2% inflation and expressed concern about rising inflation expectations. Green likewise stressed that interest rates have not yet reached a level that would put significant downward pressure on inflation.

dovish viewMPC commissioner Alan Taylor is more optimistic, arguing for four to five rate cuts a year. He believes that progress on the wage agreement is consistent with a return to 2% inflation, and that household inflation expectations have risen only modestly, with no warning signs yet.

As a moderate, Bailey tried to balance the positions of both sides, emphasizing that policy needs to be flexible based on data, while avoiding making clear commitments about the future path.

Bond yields and the quantitative tightening (QT) controversy

Earlier on Wednesday, the yield on 30-year UK government bonds rose to 5.75 per cent, the highest level since 1998, drawing market attention. Mr. Bailey said investors should not "focus too much" on the phenomenon, noting that 30-year bonds were not the government's main funding vehicle and that rising yields reflected global trends rather than UK-specific problems. He stressed that the fall in five-year yields had a more pronounced impact on funding costs.

At the same time, the Bank of England's quantitative tightening (QT) policy has been controversial. Since February 2022, when it stopped replacing maturing bonds and began selling government bonds in November of the same year, the size of the central bank's bond holdings has been reduced from 895 billion pounds to 558 billion pounds. Bailey revealed that the bond reduction plan for the next 12 months will be announced on September 18, and the market expects that the size of the reduction may be reduced from the current 100 billion pounds to 60 billion pounds, in order to reduce the pressure on the long-term bond market. Bank of America economists pointed out that the reduction of QT is designed to "minimize the impact on the long end of the government bond market, especially when the market is obviously fragile".

Critics argue that QT has pushed up government borrowing costs against a backdrop of increased pressure on public finances. The Bank of England estimates that QT has raised borrowing costs by 15-25 basis points since it was launched in early 2022, but Bailey insists the recent 325 basis point rise in 10-year yields has been driven by global factors rather than QT.

Global Perspective: Fed Pressure and Central Bank Independence

At the hearing, Mr. Bailey also voiced concerns about external pressures on the Fed, noting that former US president Donald Trump's attacks on the central bank and his attempts to intervene in monetary policy could lead to higher inflation and interest rates around the world. "The Fed's independence as the central bank of the world's most important economy is critical. Threatening that independence is a very dangerous path," Mr. Bailey stressed, reflecting a shared concern among central banks around the world to assert policy autonomy in the face of political pressure.

Market and policy outlook

Taken together, the Bank of England is at a complex policy crossroads. Persistent above-target inflation, a widening split within the MPC, and rising global bond yields all cast a shadow over the path of future rate cuts. Markets are more cautious about rate cuts before April 2026, while Bailey's "gradual rate cuts" statement provides direction for the market, but lacks specific guidance and may exacerbate market volatility in the short term.

Investors need to keep a close eye on the QT decision on September 18 and upcoming economic data, particularly inflation and wage growth trends. These factors will directly affect the pace of the Bank of England's policy and have far-reaching implications for the pound and the London stock market.