Bank of England Holds Rates at 4.25% But Signals Cuts Could Be Coming

Weaker UK labour market and global tensions shape cautious monetary outlook as inflation risks linger

Interest Rate Pause as Bank Eyes Economic Headwinds

The Bank of England (BoE) has held the Bank Rate steady at 4.25%, with the Monetary Policy Committee (MPC) voting 7–3 in favour of no change. However, the tone of the meeting suggests that interest rate cuts may be on the horizon, as economic concerns mount.

Labour Market Weakness Could Drive Future Cuts

Despite geopolitical risks and global inflation pressures, the BoE highlighted rising unemployment and a fall in job vacancies as key factors that could justify lower interest rates in the near term.

Governor Andrew Bailey stated:

“We are seeing signs of softening in the labour market. We’ll monitor how this impacts inflation.”

April’s changes to national insurance contributions and minimum wage increases have led to cost pressures on employers, prompting a rise in job losses and a cooling jobs market.

Global Risks Complicate Outlook

Although the labour market may allow for monetary easing, global events are adding uncertainty:

• The Israel-Iran conflict has led to double-digit increases in oil and gas prices
• US trade tensions continue to fuel instability in global supply chains
• The energy shock risks reigniting inflation, especially if conflicts escalate further

The BoE stressed that it remains “vigilant” over how these risks might affect the UK economy.

Inflation Still a Key Concern

The UK inflation rate currently stands at 3.4%, down from last year’s peak above 11%. However, recent spikes in energy prices could derail progress:

• Natural gas costs surged after Middle East hostilities escalated
• Households and businesses face potential rises in energy bills
• The BoE warns this could push inflation up again later in the year

The Bank reaffirmed its “gradual and careful” approach, prioritising stability over speed in cutting rates.

Market Expectations: Rate Cuts Ahead?

Financial markets, according to LSEG data, are already pricing in:

• A 0.25% rate cut at the BoE’s next meeting in August
• At least one more cut by the end of 2025, depending on inflation trends

Investment analyst Nicholas Hyett commented:

“Middle East tensions risk higher energy prices. While forecasting outcomes there is difficult, the BoE still expects inflation to remain broadly stable this year.”

However, he warned that continued uncertainty may leave the BoE “paralysed”, keeping rates unchanged longer than desired.

Summary: Balancing Risks and Recovery

• Bank Rate remains at 4.25%, with a majority vote
• Weak labour data raises prospects of near-term rate cuts
• Middle East conflict and global trade issues cloud inflation outlook
• Markets anticipate a rate cut in August, with more to follow
• BoE remains cautious, prioritising stability amid global uncertainty

Sources: (SKY.com, BBC.co.uk)