Bank of England Holds Rates Steady at 4.25% in Dovish 6-3 Vote
The Bank of England held interest rates at 4.25% in a more divided vote than expected as policymakers reacted to signs of softening in the labor market and weak growth against a backdrop of mounting geopolitical tensions.
In a decision that left rates on course for a potential quarter-point cut in August, six of the BOE’s nine Monetary Policy Committee members voted to leave rates unchanged while three - externals Swati Dhingra and Alan Taylor, as well as Deputy Governor Dave Ramsden — preferred an immediate quarter-point reduction.
The minutes to the meeting showed that the committee “expected a significant slowing over the rest of the year” in pay growth as the jobs market continues to loosen. Striking a dovish note, it said there were “some greater signs of disinflationary pressures from the labor market.” It left its core guidance unchanged that future rate cuts will be “gradual and careful.”
“Interest rates remain on a gradual downward path,” said Governor Andrew Bailey. “The world is highly unpredictable. In the UK we are seeing signs of softening in the labor market. We will be looking carefully at the extent to which those signs feed through to consumer price inflation.”
The bank has lowered rates four times since August into steadily building economic and political headwinds that started in April with US President Donald Trump’s global trade war and escalated last week after Israel attacked Iran. The US is preparing for a possible strike on Iran, potentially raising the stakes even further.
The committee noted the sharp rise in oil prices since Israel’s attack, which pushed them up more than 10% at one point and is threatening the drive inflation higher. It said it would “remain vigilant about these developments and their potential impact on the UK economy.”
There was better news on trade following last week’s US deal with China over rare-earth exports and confirmation that some restrictions on the UK will be dropped. “The direct impact of the trade shock on world GDP could be smaller than the committee had expected,” it said. “Trade policy uncertainty would nevertheless continue to have an impact on the UK.”
The improved trade backdrop meant that, although underlying GDP growth “remained weak,” the MPC raised its second quarter forecast to 0.25% from 0.1% in May - providing some support to the government’s claims it has fixed the foundations of the economy and growth is improving.
The MPC is trying to balance elevated inflation against a cooling economy but its job is being complicated by conflict in the Middle East and US trade policy. May’s spike in inflation to 3.4% from 2.6% in March, on the back of temporarily higher household energy bills, was in line with the BOE’s May forecasts, it said.
Before the June decision, markets gave an August quarter-point rate cut an 80% probability and traders were pricing two further reductions by summer 2026 that would result in rates rates settling around 3.5%.
The decision to hold rates this month followed the same action by the US Federal Reserve on Wednesday. The Fed has now held the benchmark federal funds rate in a range of 4.25%-4.5% at four successive meetings.
Source : Bloomberg
