The Bank of England has kept interest rates steady at 4.25% but signalled that further cuts could be on the horizon later this year, as signs of a weakening economy and rising unemployment continue to emerge.
At its latest meeting, six out of nine members of the Bank’s monetary policy committee (MPC) voted to hold rates, while three supported a cut to 4%. Since last August, the Bank has already implemented four quarter-point reductions, as it shifts towards a more accommodative stance.
Governor Andrew Bailey confirmed that interest rates were “on a gradual downward path”, citing early signs of a softer labour market. However, he warned that the global economic environment remained “highly unpredictable,” making it difficult to determine the timing of future cuts.
Markets are betting on the MPC to lower rates again in August and possibly reduce them to 3.75% before the end of 2025. Economic figures show the UK economy shrank by 0.3% in April, after a modest 0.7% expansion in the year’s first quarter. Unemployment has increased, job vacancies have fallen back to pre-pandemic levels, and wage growth has slowed.
Labour market weakens as investment stalls
The Bank’s latest report points to weak business confidence, with regional agents reporting that firms remain hesitant to invest due to continued uncertainty. Business surveys reflect a subdued outlook, and the MPC predicts growth of just 0.25% per quarter for the rest of the year, slightly better than earlier projections, but still muted.
Inflation is expected to rise temporarily in the coming months due to higher energy prices, before falling back as wage growth eases. UK inflation fell slightly in May, down to 3.4% from 3.5% in April, driven by falling air fares and petrol prices. However, food costs remain high, with chocolate prices hitting record levels due to poor harvests in major producing countries.
Kathleen Brooks, research director at currency firm XTB, said the Bank appeared more concerned about weak growth than inflation. “It’s clear their main goal is to hit the 2% inflation target,” she said, “but they’re sounding increasingly worried about the health of the economy.”
Paul Dales, chief UK economist at Capital Economics, expects further cuts. “We think it’s only a matter of time before the slowdown in employment causes a sharp drop in wage growth,” he said. “That’s why we’re still forecasting quarter-point cuts in August, November and February.”
Energy prices and global risks remain key concerns
Energy prices remain a risk factor. Brent crude oil has risen 26% to $79 a barrel since May, partly due to tensions between Israel and Iran. European gas prices have also climbed 11%. While this hasn’t affected the current decision, some Bank officials are cautious about the potential for renewed inflation, particularly if energy costs drive up prices across services, as seen in 2022.
Bailey also acknowledged that international developments, including US tariff policies under Donald Trump, contribute to inflation and rate uncertainty. “The path remains downwards,” he said, “but how far and how quickly is now shrouded in a lot more uncertainty, frankly.”
That said, the Bank noted that the impact of US tariffs so far has been less severe than initially feared.
Since taking office last summer, Chancellor Rachel Reeves has linked the Bank’s ability to cut rates with Labour’s “prudent fiscal policy.” With further cuts expected, Labour will be hopeful that lower borrowing costs will encourage business investment and help lift economic growth in the months ahead.
Get in touch to discuss your finances.