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The rate cut is the bank’s fifth since last August, when policy makers began lower borrowing costs from a 16-year high of 5.25%. The Bank of England’s key rate — a benchmark for mortgages as well as consumer and business loans — is now at the lowest level since March 2023.

“There will be hopes that if loans become cheaper, it will help boost consumer and business confidence but there’s a long way to go,� Susannah Streeter, head of money and markets at Hargreaves Lansdown, said before the decision. “In the meantime, speculation over potential tax rises in the Autumn Budget may keep households and companies cautious, given the uncertainty over where extra burdens may land.�

Policymakers decided to cut rates even though consumer prices rose 3.6% in the 12 months through June, significantly above the bank’s 2% target. The bank sees the recent rise in consumer prices as a temporary spike, due in part to high energy costs, and expects inflation to fall back to the target next year.

Against the backdrop, policy makers were faced with reports that the government may be forced to raise taxes later this year due to sluggish economic growth, rising borrowing costs and pressure to increase spending.

Britain’s unemployment rate rose to 4.7% in the three months through May, the highest level in four years, signaling that previous tax increases and uncertainty about the global economy are weighing on employers.

The U.K. economy grew 0.7% in the first three months of 2025 after stagnating in the second half of last year.