Bank of England Maintains Interest Rates as Global Central Banks Take Different Paths

The Bank of England stood firm on Thursday, maintaining interest rates at 4.25 per cent whilst other major central banks across Europe opted for rate reductions. The monetary policy committee’s decision revealed growing divisions, with a 6-3 vote favouring the hold position, diverging from analysts’ expectations of a 7-2 split.

Deputy Governor Dave Ramsden shifted his stance to align with external committee members Swati Dhingra and Alan Taylor, advocating for a 0.25 percentage point reduction. This unexpected move highlights the mounting tensions within the committee regarding the UK’s economic trajectory.

The committee faces a complex balancing act amid what they term “two-sided” inflation risks. Six MPC members, likely including Chief Economist Huw Pill and Catherine Mann, express concerns about persistent inflation driven by poor productivity growth, labour market changes, and rising food prices.

Market figures from the Office for National Statistics revealed the steepest decline in payrolled employment since the pandemic’s onset, strengthening the case for immediate policy loosening. The Bank’s moderates, including Governor Andrew Bailey and deputy governors Sarah Breeden and Clare Lombardelli, maintain a centrist position between the competing viewpoints.

City analysts remain optimistic about future rate cuts. Nomura suggests August could bring a 0.25 percentage point reduction, while the EY Item Club forecasts the Bank will maintain its pattern of cutting rates at alternate meetings. The MPC continues to emphasise its “gradual and careful” approach to monetary policy adjustments.

The inflation outlook remains challenging, with rates expected to hover around 3.5 per cent throughout the year. Recent data showed a marginal decrease to 3.4 per cent in May. External pressures, including rising oil prices due to Middle East tensions and potential impacts from US trade policies, could influence future monetary decisions. The committee’s acknowledgement of a weakening labour market suggests two additional rate cuts might materialise before year-end.