The Bank of England has cut the base rate of interest to 4.25% from 4.5% as it lowered its forecasts for inflation this year and economic growth in the next two years.
However, a divergence of opinion on the BoE's monetary policy committee, with only a 5-4 majority to reduce Bank Rate by 0.25 percentage points, disappointed market hopes for a faster rate of cuts in coming months.
Two members preferred a larger 0.5 percentage points cut to 4%, while another two wanted to maintain the rate at 4.5%.
Alongside the interest rate decision, the BoE released a new set of economic forecasts, including a new prediction that CPI inflation will be 2.4% in one year's time, down from its forecast of 3% at the last February report.
Gross domestic product is now expected to grow 1.0% in 2025, up from the February forecast of 0.75%, with 2026 anticipated to see 1.25% growth, which is lower than the previous 1.5% and the 2027 growth prediction was slashed to 1.5% from the previous 4.5%, before Donald Trump's full tariff announcements.
Future path for rates
In its statement alongside the May meeting minutes, MPC kept its overall stance that a "gradual and careful approach" to easing remains the current appropriate course, but flagged that its approach to policy could change if necessary, as US tariffs have led to volatility in financial markets and weaker prospects for global growth.
"Based on the Committee’s evolving view of the medium-term outlook for inflation, a gradual and careful approach to the further withdrawal of monetary policy restraint remains appropriate," the monetary policy committee said in its statement.
The MPC added that it had considered "a range of possibilities for how domestic inflationary pressures could evolve, as well as the broader circumstances that could necessitate varying the course of policy".
"Monetary policy is not on a pre-set path. The Committee will remain sensitive to heightened unpredictability in the economic environment and will continue to update its assessment of risks."
Reaction
The FTSE 100 asd FTSE 250 both fell slightly after the decision was announced, but quickly returned to where they were.
UK government bond yields, which had fallen over the past few weeks, bounced, with 2-year and 5-year gilts seeing sharper spikes than for the 10-year.
Rob Wood, economist at Pantheon Macroeconomics, said the MPC keeping the word 'gradual' in the guidance "disappointed market expectations", with the committee shifting to a stance that was "more dovish, but not as much as markets expected".
Wood said the market had progressively priced more cuts over the past few days as expectations built that the MPC would remove the word gradual from their guidance, and that as many as three or four members might vote for a 50bps cut.
"All told," he said, "the MPC’s vote and minutes are too cautious for us to be able to retain a call of a back-to-back rate cut in June. We shift to a quarterly path - cuts in August and November - and see balanced risks. That said, the MPC left the door open to moving faster if conditions deteriorate, by saying that policy was not on a pre-set path."
Daniel Casali, chief investment strategist at Evelyn Partners, said: "This decision came before any details on the UK-US trade have emerged, and indeed the devil will be in that detail.
"But this rate cut, alongside the news that the UK is the first country to strike a US trade deal, coming hot on the heels of the India agreement, will doubtless help the Government to paint a more optimistic picture for the UK economy."
Susannah Streeter, head of money and markets at Hargreaves Lansdown, said: "By cutting borrowing costs, they’re hoping to relieve pressure on businesses, stimulate demand in the economy and shine a light towards a recovery.
"Although the framework of a trade deal with the US is expected to be announced later, which should alleviate some unpredictability for businesses, there is still plenty of uncertainty around about the global effects of trade wars on the UK economy."
While inflation is still above target, deflationary forces are at work, she added, with "worrisome consequences for growth" likely to act as a dampener on price rises.
"A recession rather than stubborn inflation is the ogre to avoid right now. The niggling worry of high pay demands looks set to be fading into the background given that hirings have been scaled back by many firms. There is also the chance that an influx of cheaper Chinese-made goods could infiltrate the retail scene and land in virtual baskets," Streeter said.
** Update: Adds market reaction and expert comments **