The Bank of England (BoE) has held interest rates at 4.25%, a move widely expected by financial markets amid significant uncertainty over the economic impact of tariffs, UK government policy, and escalating conflict in the Middle East.
In a statement, the BoE said six members of the monetary policy committee had voted in favor of holding rates, with three members voting for a cut of 0.25%.
Among them were MPC members Swati Dhingra and Alan Taylor, who voted for a bumper rate cut of 0.50% at the MPC’s May meeting and have also been vocal about their support for lower rates. Dave Ramsden also voted for a quarter-point cut, as he did in May.
In May the MPC had a different split: five members voted for a quarter-point cut, two for a half-point-cut and two voted for no change to interest rates.
Monetary Policy Not on a Pre-Set Path
“Global uncertainty remains elevated,” the Bank said.
“Energy prices have risen owing to an 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.
“Given the outlook, and continued disinflation, a gradual and careful approach to the further withdrawal of monetary policy restraint remains appropriate. Monetary policy is not on a pre-set path.”
UK Rate Cuts Expected in Q3 and Q4
The decision follows four previous rate cuts in July and November 2024, and February and May 2025.
The market reaction was muted, and bond yields across shorter maturities are largely unchanged from Wednesday. The yield on the 10-year gilt softened after the announcement to around 4.51%.
Today’s decision puts bond investors one step closer to clarity on the total number of rate cuts the Bank makes this year. After today, there are just four more monetary policy meetings in 2025.
Markets now expect two further rate cuts in August and November, which would leave the UK with four rate cuts in total by the end of 2025.
“‘Cut and observe’ seems to be the BoE’s modus operandi in these uncertain economic times, and today’s announcement followed this format exactly,” says Morningstar senior analyst Michael Field.
“The messaging from the BoE seems very clear that more rate cuts are coming—the only question is when. At 4.25%, and on par with the US, the UK has some of the highest interest rates in the world.
“Granted, inflation spiked recently, but once transitory effects fade, its likely to settle close to the central bank’s targeted 2% level, leaving it free to cut rates more liberally.”
What Did The Bank of England Say About Inflation?
The Bank of England has already forecast a rise in inflation this year to 3.75% and the data appears to be supporting this trend.
April data saw CPI rise from 2.6% to 3.5%. Due to a data error, that 3.5% figure has been corrected to 3.4%. But this is still significantly above the Bank’s official 2% inflation target and eurozone inflation, which dipped below target.
On June 18, the Office for National Statistics said that annual CPI inflation had risen by 3.4% in May, so this is effectively no change from the month before.
“Twelve-month CPI inflation increased to 3.4% in May from 2.6% in March, in line with expectations in the May Monetary Policy Report,” the Bank said today.
“The rise was largely due to a range of regulated prices and previous increases in energy prices. Consumer price inflation is expected to remain broadly at current rates throughout the remainder of the year before falling back towards target next year.”
Will The Bank of England Continue to Cut Rates?
Analysts observe that the Bank of England is weighing up the significance of several different factors affecting UK inflation.
Among them is conflict in the Middle East, and the potential effect of rising oil prices on fuel and transport costs in the UK, but it is also monitoring the anticipated impact of tariffs on the UK economy, alongside the ongoing effects of the government’s April increase in employer National Insurance contributions, something already visible in May’s inflation data. That showed a significant increase in food and non-alcoholic beverage prices as large food retailers and supermarkets passed on higher labor costs to consumers by increasing prices.
Despite upwards price pressure, financial markets are still pricing in two further rate cuts before the end of the year, in August and November.
“For now, we are sticking by our call for just two further cuts to the base rate between now and year-end, possibly in August and November, when the latest monetary policy reports will be released,” says Matthew Ryan, head of market strategy at Ebury.
“We don’t believe that the MPC will entertain the idea of lowering rates more aggressively than that just yet, and we think that any downside in sterling off the back of Thursday’s announcement will be limited.”
Morningstar’s Field says that investors will now have to be patient.
“Falling rates are a boon to equity markets, but investors will have to be patient,” he says.
“Equity markets have rallied to pre-tariff levels, even without the certainty of a trade deal, but we believe some sectors, like energy for instance, have been left behind. As such we still see attractive opportunities in the UK market.”
