Bank of England narrowly votes to cut interest rates to 4% as balancing act continues

The Bank of England voted by a fine margin to cut interest rates from 4.25% to 4% on Thursday as the central bank resumed what it describes as a “gradual and careful” approach to monetary easing.

The BOE was widely expected to trim rates by 25 basis points at its latest monetary policy meeting, but traders and economists were keen to see the breakdown of support for the decision among the bank's policymakers.

As it turned out on Thursday, the nine-member MPC voted by a majority of 5–4 to reduce the key interest rate, the “Bank Rate,” by 25 basis points rather than keeping it on hold. The British pound rose 0.5% against the dollar after the decision, to $1.3424.

Policy makers have had to weigh up sticky inflation — the consumer price index (CPI) rose to a hotter-than-expected 3.6% in June from 3.4% in May — with a cooling jobs market and lackluster growth. The U.K.'s gross domestic product contracted 0.1% month-on-month in May.

In a statement Thursday, the bank said the MPC “remains focused on squeezing out any existing or emerging persistent inflationary pressures, to return inflation sustainably to its 2% target in the medium term.”

The MPC was initially split on reducing or holding interest rates with four members wanting to hold rates, four others voting to cut and one policymaker voting for a larger 50-basis-point cut. The committee then held a second round of voting to arrive at a majority decision to cut rates by 25 basis points.

The voting is a reflection of the “finely balanced situation” the MPC currently faces in terms of the factors driving monetary policy, according to BOE Governor Andrew Bailey.

“There's an upside risk to inflation, and particularly as to whether... this current increase could persist somewhat more than we expect it to. We don't expect it to actually, but could it?” Bailey told CNBC's Ritika Gupta in an interview. “But... that has to be set in the context of the labor market conditions, which appear to be softening.”