The narrow decision suggests considerable debate over whether to cut the base rate.

The bank's Monetary Policy Committee voted, however, to reduce the rate amid signs inflation is coming under control. It's the first reduction since March 2020.

At its meeting ending on 31 July, the MPC voted by a majority of 5–4 to reduce the Bank Rate by 0.25 percentage points, to 5%. Four members wanted to maintain the rate at 5.25%.

In its report published today, the MPC said that CPI inflation was expected to increase to around 2.75% in the second half of this year, as declines in energy prices last year fall out of the annual comparison, revealing more clearly the "prevailing persistence of domestic inflationary pressures."

Private sector regular average weekly earnings growth has fallen to 5.6% in the three months to May, and services consumer price inflation has declined to 5.7% in June, the MPC said. GDP has picked up quite sharply so far this year, the MPC added, but underlying momentum appears weaker.

The Committee expects the fall in headline inflation to continue to feed through to weaker pay and price-setting dynamics.

A margin of slack should emerge in the economy as GDP falls below potential and the labour market eases further. Domestic inflationary persistence is expected to fade away over the next few years, owing to the restrictive stance of monetary policy.

However, the MPC warned that there is a risk that inflationary pressures could prove more enduring in the medium term. 

The MPC said that monetary policy will need to continue to remain restrictive for some time until the risks to inflation returning sustainably to the 2% target in the medium term have dissipated further. 

The CPI rate of inflation is now at 2%, in line with the Banks' target. CPI inflation has fallen steadily after peaking at over 11% in 2022.

Reaction to the cut has generally been positive so far.

Sarah Pennells, consumer finance specialist at Royal London, said: “Finally, after a year of Base Rate holding firm, the Bank of England has made the decision to lower the rate by 0.25 percentage points.   

“This is the first time the rate has reduced since it was dramatically cut to 0.1% in April 2020 and will be welcome news for mortgage holders who will now be hoping this rate cut is followed by others in the coming months."

Andrew Summers, chief investment officer at Omnis Investments, said: “It was a close call with 16bps of cuts being priced ahead of the meeting.

"Whilst there had been a strong services inflation print recently, forward-looking indicators suggest that there is downside risk to services inflation in the coming months. For example, Homelet and RICs surveys suggest there is downward pressure on the Rents for Housing component of CPI. In addition, unemployment is rising and job vacancies are slowing, which should drive wages lower from here. Our expectation is that the Bank will lower rates further at the September meeting and ultimately more cuts will be delivered than what is currently discounted by markets.”

Lindsay James, investment strategist at Quilter Investors, said: "The Bank of England has finally spotted its opportunity to cut interest rates and has enacted its first reduction since the onset of the pandemic today. This will bring a huge collective sigh of relief to consumers and businesses up and down the country after interest rates reached the highest level in 16 years. 

“With the market having been on the fence ahead of the announcement, with a 66% chance of a quarter-point cut, in the event the decision by the MPC was indeed a very close thing with a 5-4 majority decision. The Bank of England is making it clear to everyone this will not be a speedy journey on the way back down as it does not want to cut too quickly or by too much and risk a fresh inflationary spiral."

• The next Bank of England base rate review is due on 19 September.