Bank of England Set to Hold Interest Rates as Markets Eye Future Cuts

The Bank of England’s Monetary Policy Committee (MPC) is poised to maintain its cautious stance at this week’s meeting, with interest rates expected to remain at 4.25 per cent. Since September 2024, the central bank has emphasised a ‘gradual’ approach to monetary policy loosening, following the first post-pandemic rate cut decided by a narrow 5-4 vote.

Market participants anticipate one or two additional rate reductions this year, potentially bringing borrowing costs to their lowest levels since January 2023. However, the timing of these cuts remains uncertain, with various economic indicators sending mixed signals to policymakers.

Recent labour market data has shown significant weakness, with HMRC reporting a 109,000 decline in payroll employees in May—the largest monthly drop since May 2020. The unemployment rate has climbed to 4.6 per cent, reaching a four-year high, whilst private sector wage growth has slowed to 4.8 per cent, its lowest pace since December 2021.

Inflation concerns persist, with April’s rate rising to 3.5 per cent from 2.6 per cent in March. Services inflation, a key focus for the MPC, increased to 5.4 per cent, exceeding the Bank’s projections. However, technical adjustments due to faulty car tax data suggest the inflation figure may have been overstated.

The economic outlook faces additional complexity from external factors, including potential US-China trade tensions and ongoing geopolitical uncertainties in the Middle East. The MPC remains divided, with some members advocating for larger rate cuts while others express concerns about persistent wage growth pressures.

Governor Andrew Bailey’s recent testimony to the Treasury Committee provided limited forward guidance, emphasising the considerable uncertainty surrounding both the pace and extent of future rate reductions. The consensus expects a 7-2 vote to maintain current rates, with external members Swati Dhingra and Alan Taylor likely to favour a 25 basis point cut.