Bank of England Holds Rates at 4.25%, Adopts Gradual Approach to Easing

The Bank of England (BOE) maintained its benchmark interest rate at 4.25% on Thursday, a widely expected decision as the central bank continues to pursue a gradual approach to monetary policy easing. This decision follows the BOE’s recent cut in May, when it reduced its Bank Rate by 25 basis points from 4.50%. This was the second rate cut this year, marking a total of four reductions from the peak of 5.25% in 2024.

Divergence in Monetary Policy Committee’s Vote

While the decision to hold rates steady was largely anticipated, it was not unanimous. Three members of the nine-member Monetary Policy Committee (MPC) voted in favor of a further rate cut, indicating ongoing internal debate about the pace of policy easing.

In the accompanying statement, the BOE emphasized that the “gradual and careful approach” to withdrawing monetary policy restraint remains appropriate, given the outlook for continued disinflation. The central bank reiterated that its monetary policy is not on a predetermined path and that it will continue to monitor inflation risks and economic data closely.

Mixed Economic Signals: Growth and Inflation

The U.K. economy has shown mixed performance, with reasonably strong growth at the start of the year, registering a 0.7% increase in the first quarter of 2025. However, in April, the economy contracted by 0.3%, driven by the combined effects of higher taxes and rising energy prices. This weaker-than-expected performance prompted the Confederation of British Industry (CBI) to revise its growth forecast downward, now projecting U.K. growth of 1.2% in 2025, down from the previously expected 1.6%.

Despite the sluggish growth, inflation remains a primary concern for the central bank. May’s headline inflation registered at 3.4% year-over-year, slightly down from the previous month but still significantly above the BOE’s 2.0% medium-term target. Private sector wage growth has also cooled from 6% to around 5%, which could alleviate some of the inflationary pressures.

Unemployment and Wage Growth

The unemployment rate stood at 4.6% for the three months to April, aligning with the BOE’s projections for Q2 of 2025. However, the combination of rising costs and the slowdown in wage growth presents challenges for the BOE as it navigates the balance between controlling inflation and supporting economic recovery.

Outlook for Future Rate Cuts

Looking ahead, analysts expect further rate cuts, with UBS projecting two more 25 basis point reductions in August and November, bringing the Bank Rate to 3.75% by the end of the year. Similarly, Deutsche Bank anticipates rate cuts in August, November, and December, while ING expects cuts in August and November.

In the longer term, UBS projects a terminal rate of 3.0% by 2026, more dovish than current market expectations. Both Deutsche Bank and ING, however, forecast a terminal rate of 3.25%.

While the Bank of England has opted to maintain rates for now, the outlook remains uncertain as inflationary pressures persist amid a mixed economic recovery. Market participants will be closely watching upcoming economic data, MPC votes, and central bank statements for further clues on the pace of future rate cuts and the overall trajectory of U.K. monetary policy.