The Bank of England (BoE) decided to keep interest rates at 4.25% on Thursday, a move widely anticipated by economists. However, the central bank expressed concern over potential risks stemming from a weakening labor market and the rising cost of energy due to escalating conflict in the Middle East.
The Monetary Policy Committee, citing heightened global uncertainty and persistent inflation, voted 6-3 to maintain the current rate. Notably, Deputy Governor Dave Ramsden joined two other members in voting for a quarter-point rate cut. This contrasted slightly with a Reuters poll that had predicted a 7-2 vote to hold rates, following the BoE’s fourth interest rate cut since August 2024 last month.
BoE Governor Andrew Bailey affirmed that “interest rates remain on a gradual downward path,” but also stressed that future rate adjustments aren’t predetermined. He highlighted the “highly unpredictable” global environment, stating the BoE would carefully monitor how signs of a softening UK labor market impact consumer price inflation. While the recent Middle East tensions weren’t the primary factor in June’s decision to hold rates, the central bank will keep a close eye on their potential impact on energy prices and, consequently, the UK economy.
Most economists polled by Reuters expected the next rate cut in August, with another likely in the last three months of 2025, bringing the rate to 3.75% by December. The BoE reiterated its commitment to a “gradual and careful” approach to further rate cuts. Interestingly, the Bank’s internal analysis suggested that the economic impact of U.S. President Donald Trump’s tariffs might be less severe than previously thought in May, though trade uncertainty will still affect the UK economy.
The BoE’s inflation forecast for the latter half of 2025 remains largely unchanged, predicting a peak of 3.7% in September and an average of just under 3.5% for the remainder of the year. The UK economy is now expected to grow by approximately 0.25% in the second quarter of 2025, a slight improvement from May’s forecast, despite underlying weakness.
Compared to other major central banks, the BoE’s interest rate cuts since mid-2024 mirror the U.S. Federal Reserve’s 1 percentage point reduction (the Fed held rates at 4.25%-4.50% this week). However, this is only half the easing seen from the European Central Bank, which has experienced less persistent inflation. Markets anticipate further easing from both the Fed and the ECB this year. Meanwhile, the Federal Reserve adjusted its 2025 economic growth forecasts downwards while increasing its inflation projection, noting that economic uncertainty, though lessened, remains high. Earlier this week, the Swiss National Bank cut its rates to zero due to decreasing inflationary pressures and a focus on trade war risks.
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