BoE holds rates at 4.25% amid weak growth and escalating global risks

The Bank of England (BoE) held its benchmark interest rate at 4.25% on Thursday, pausing its monetary easing cycle amid weak GDP growth and a softening jobs market, with geopolitical conflicts exerting an upward pressure on prices.

The decision came as no surprise to markets, with economists largely predicting the central bank would wait until August before resuming cuts.

Of the nine members of the BoE’s Monetary Policy Committee (MPC), six voted to maintain the current rate, while three backed a 25 basis point cut.

The closely watched decision followed a quarter-point reduction in May, the fourth cut since August 2024.

Inflation in the UK eased to 3.4% in May, aligning with expectations but still well above the central bank’s 2% target.

“Underlying UK GDP growth appears to have remained weak, and the labour market has continued to loosen, leading to clearer signs that a margin of slack has opened up over time,” the central bank said in a statement.

“Interest rates remain on a gradual downward path,” BoE Governor Andrew Bailey said, although policymakers added that interest rates were not on a pre-set path.

Inflation still stubbornly high

The BoE highlighted that despite a cooling trend, inflation is expected to remain stable for the rest of 2025 before retreating toward the 2% target next year.

Earlier forecasts from the central bank suggest inflation could rise to 3.7% in the third quarter before tapering off in 2026.

The committee reiterated that rates are not on a pre-set path and that further decisions would depend on economic data and global developments.

“We will be looking carefully at the extent to which [labour market changes] feed through to consumer price inflation,” Bailey said.

Middle east conflict, US tariffs also putting inflationary pressures

While not a driving factor in Thursday’s decision, the BoE acknowledged that escalating conflict in the Middle East, particularly between Israel and Iran, is contributing to upward pressure on energy prices.

It warned that “global uncertainty remains elevated” with energy prices rising due to the escalation of the conflict in the Middle East.

“The Committee will remain sensitive to heightened unpredictability in the economic and geopolitical environment, and will continue to update its assessment of risks to the economy,” it added.

Additional concerns stem from proposed tariffs by US President Donald Trump, which may disrupt global trade flows and stoke price volatility.

The combination of external shocks and weak domestic output — including a 0.3% contraction in April GDP — has placed the BoE in a tight position.

Labour market softens as growth weakens

Policymakers continue to express caution over potential second-round effects, where rising prices lead to increased wage demands, risking more persistent inflation.

At the same time, signs of strain in the labour market and a sluggish economy are weighing on demand.

Source: Bloomberg

Economic pressures have been further amplified by Chancellor of the Exchequer Rachel Reeves’ £26 billion corporate tax package, which some analysts warn could suppress business investment and hiring.

“Measures of pay growth have continued to moderate and, as in May, the Committee expects a significant slowing over the rest of the year,” it said, adding that the MPC “remains vigilant about the extent to which easing pay pressures will feed through to consumer price inflation.”

When is monetary easing expected to begin?

Money markets currently project two additional 25 basis point cuts before the end of 2025.

The next move is widely expected in August, with a final trim likely in the fourth quarter.

John Gieve, former BoE Deputy Governor, told CNBC that interest rates may edge down to 4% or slightly lower by year-end, barring any major geopolitical shock.

“We don’t know how this conflict in the Middle East will play out, and we don’t know how tariffs are going to play out. So [BoE policymakers] are going to have to watch things month by month,” Gieve said.

David Morrison, senior market analyst at Trade Nation, said, “While further rate reductions have been signalled, most analysts now expect these to come later in the year, as the Bank weighs the need to support growth against its 2% inflation target.”

There remain two-sided risks to inflation, the central bank concluded, noting that “given the outlook, and continued disinflation, a gradual and careful approach to the further withdrawal of monetary policy restraint remains appropriate.”

Markets react as the pound slips

In the currency markets, the pound slipped after the rate decision.

As of 1102 GMT, it was down 0.1% at $1.3415 against the dollar, which remained broadly stronger following the US Federal Reserve’s decision to hold rates steady and lower its economic growth forecast.

Morrison said the fall reflected that one more member of the MPC voted to cut rates than expected, thereby increasing the probability of another rate cut at the Bank’s next meeting in August.

But there’s a lot of economic data due before then. So overall, investors will be wary of reading too much into this.

Sterling was flat against the euro at 85.53 pence.

Despite Thursday’s dip, the pound has appreciated 7.3% against the dollar in 2025, largely driven by capital outflows from US markets amid escalating trade tensions.

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