The Bank of England surprised markets Friday by cutting its benchmark Bank Rate by 25 basis points to 3.50%, the lowest level since September 2022, in a 7-2 vote split that delivered earlier easing than economists had expected. Headline inflation cooled to 2.1% in March from 2.6% in February, dropping below the central bank's medium-term target for the first time in nearly four years.
Sterling fell 1.4% against the dollar to $1.2480 immediately after the announcement, while the FTSE 100 added 1.8% to close at a record 9,425. The yield on the UK 10-year gilt dropped 14 basis points to 3.62%, its largest single-day decline since the post-mini-budget rally of late 2022.
Bailey Signals More Easing Ahead
Governor Andrew Bailey told reporters at the post-decision press conference that the Committee judged the disinflationary process to be sufficiently advanced to begin a more meaningful easing cycle. He highlighted services inflation falling to 3.4% from 4.7% three months earlier and wage growth in the private sector decelerating to 4.1% as evidence that domestic price pressures had broken decisively.
Two MPC members, Catherine Mann and Megan Greene, dissented in favor of holding rates steady, citing concerns that lower energy prices following the Hormuz reopening represented a transitory dynamic that could reverse if OPEC implements production cuts in June. The minutes will be released Wednesday and are expected to detail their reasoning.
Implications for the Pound and UK Banks
Markets now price three additional cuts by year-end, taking Bank Rate to 2.75%. That trajectory is more dovish than the European Central Bank, which is expected to cut just twice more in 2026, and roughly aligned with the Federal Reserve's expected path. UK bank stocks were mixed on the news, with Lloyds and NatWest gaining as falling rates lift mortgage demand, while HSBC and Barclays underperformed on net interest margin concerns.
For the wider European outlook, the BOE's surprise dovishness puts pressure on Christine Lagarde at the ECB to act decisively at the June meeting. Eurozone inflation has likewise cooled, and weakness in German manufacturing data suggests the regional economy has more downside risk than upside surprise as 2026 progresses.