The Bank of England (BoE) kept its key interest rate at 4.25% at its latest meeting, with six of the nine members of the Monetary Policy Committee (MPC) voting to keep rates unchanged, while three supported a 25 basis point cut. The BoE said UK economic growth remained weak with the labour market remaining loose, signaling excess capacity that could allow inflation to gradually ease. Wage pressures are also showing signs of easing, but the central bank remains wary of their impact on consumer prices.
However, global uncertainty has added to the challenges for monetary policy. Escalating conflict in the Middle East has pushed up energy prices, making the inflation outlook more uncertain. The BoE warned that monetary policy is “not on track”, a clear signal to investors not to expect an aggressive rate cut too soon. The risks to inflation are seen as two-sided, with pressures either easing naturally, or rising again due to external factors such as oil and tariffs.
The decision to keep rates on hold came after UK inflation data showed annual growth remained high at 3.4% in May, above the BoE’s 2% target. Weak economic growth, including a 0.3% contraction in April, has added to pressure on the BoE to find the right time to ease policy. However, concerns over US tariff policy and geopolitical tensions have made any hasty action difficult.
Economists expect the first rate cut to be made in August, followed by another by the end of the year. However, former BoE deputy governor John Gieve stressed that global uncertainty makes any predictions difficult, and the central bank needs to assess the situation on a month-by-month basis. For now, the BoE is taking a gradual and cautious approach, waiting for a balance between inflationary pressures and slowing economic growth.
