The Bank of England opted to keep its benchmark interest rate steady at 4.25% on Thursday, aligning with expectations and reiterating its commitment to a measured pace of monetary easing.
This pause follows a 25 basis point cut in May—from 4.50% to 4.25%—marking the second rate reduction this year and the fourth since rates peaked at 5.25% in 2024.
However, the decision was not unanimous. Three of the nine members on the Monetary Policy Committee (MPC) supported an additional rate cut at this meeting.
“Given the current outlook and ongoing disinflation, a cautious and deliberate approach to reducing monetary policy restraint remains warranted,” the BoE said in its statement. “Monetary policy is not on a fixed course.”
The MPC faces a complex landscape. Although the U.K. economy posted 0.7% growth in Q1 2025, GDP shrank by 0.3% in April, pressured by increased taxes and rising energy costs.
As a result, the Confederation of British Industry revised its full-year GDP growth forecast down to 1.2% from 1.6%, citing cost pressures likely to stifle business investment and hinder government efforts to stimulate economic growth.
The job market has also softened, with unemployment rising to 4.6% in the three months through April—matching the BoE’s projection for Q2 2025.
Despite signs of a cooling economy, inflation remains elevated. Annual consumer price inflation stood at 3.4% in May, down slightly from April but still well above the central bank’s 2% target.
Wage growth in the private sector has decelerated recently, easing from 6% to around 5%, which may help moderate inflation and support further rate cuts.
Looking ahead, UBS expects two additional 25 basis point rate reductions in August and November, which would lower the Bank Rate to 3.75% by year-end. Deutsche Bank sees cuts coming in August, November, and December, while ING also anticipates moves in August and November.
For the longer term, UBS forecasts a terminal rate of 3.0% by 2026—more dovish than current market pricing—while Deutsche Bank and ING estimate a terminal rate closer to 3.25%.
