Bank of England keeps interest rates unchanged; Bank Rate stays at 4.25%

Investing.com - The Bank of England maintained its benchmark interest rate at 4.25% Thursday, as widely expected, maintaining its guidance for a gradual approach to monetary policy easing.

This decision followed the central bank’s decision to cut its Bank Rate by 25 basis points from 4.50% in May, the second cut this year, and the fourth reduction from last year’s peak of 5.25%.

However, the choice to keep interest rates unchanged was not unanimous, with three policymakers of the nine-member Monetary Policy Committee (MPC) voting to cut rates again.

"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," the BOE said, in the accompanying statement.

"The Committee will continue to monitor closely the risks of inflation persistence and what the evidence may reveal about the balance between aggregate supply and demand in the economy."

The MPC faces a tricky situation.

The U.K. saw reasonably strong growth over the start of the year, rising by 0.7 per cent in the first three months of 2025, but the economy actually contracted 0.3% in April, hit by the double impact of higher taxes and a rise in energy prices.

This prompted the Confederation of British Industry to cut its growth forecast earlier this week, expecting the U.K. to grow by 1.2% this year, below the 1.6% rise it had previously predicted.

The trade body said rising costs are set to cause “weak” business investment and dampen the government’s ambitions to accelerate growth in the U.K. economy.

Additionally, the unemployment rate has reached 4.6% in the three months to April, already meeting the central bank’s projection for the second quarter of 2025.

However, despite these signs of a sluggish economy, inflation remains a key consideration for the central bank, with May’s headline inflation coming in at 3.4% year-over-year, a small drop from the previous month but still considerably above its 2.0% medium-term target.

Private sector wage growth has cooled from 6% to approximately 5% in recent months, which could provide some relief to the MPC members.

Looking ahead, UBS projects two more 25 basis point reductions in August and November, bringing the Bank Rate to 3.75% by year-end.

Deutsche Bank similarly anticipates cuts in August, November, and December, while ING expects moves in August and November.

For the longer term, UBS sees a terminal rate of 3.0% by 2026, more dovish than current market expectations, while both Deutsche Bank and ING project a terminal rate of 3.25%.