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The Bank of England has decided to maintain interest rates at 4.25 per cent but hinted at a potential cut as early as August following recent data indicating a weakening job market.
The Monetary Policy Committee’s vote of six-to-three came after a quarter-point reduction in May due to concerns about the impact of US President Donald Trump’s aggressive tariff policies.
“While interest rates are still on a gradual downward trajectory, we have chosen to keep them steady today,” stated Andrew Bailey, the governor of the BoE.
Thursday’s decision was widely anticipated as policymakers grapple with persistent high inflation and the added uncertainty stemming from the escalating tensions between Israel and Iran, and its potential effects on oil prices.
“The world is full of uncertainties,” Bailey remarked, underscoring that the central bank would closely monitor the weakening labor market’s impact on inflation.
Deputy governor Dave Ramsden, along with external MPC members Swati Dhingra and Alan Taylor, advocated for an immediate further rate cut to 4 per cent.
Gordon Shannon, a fund manager at TwentyFour Asset Management, noted that the voting pattern was slightly more dovish than what investors had anticipated.
The MPC forecasted a “significant slowdown” in wage growth, indicating that another rate cut could be considered at the August 6 meeting, while also acknowledging that “underlying UK GDP growth appears to have remained weak.”
A report from the BoE’s network of regional agents revealed that business hiring intentions were “slightly negative,” with companies in sectors such as manufacturing, retail, and construction not anticipating significant improvements in customer demand until 2026.
The MPC recognized ongoing issues with the UK’s labor market data but pointed out that May saw a 109,000 decline in the UK’s official estimate of payrolled employees, the largest monthly drop since May 2020.
It also highlighted an internal BoE measure suggesting a “subdued rate of near-zero employment growth.”
“Labor market trends indicate that the economy is deteriorating more rapidly than anticipated,” remarked Tomasz Wieladek, chief European economist for fixed income at asset manager T Rowe Price.
Earlier in the week, data from the Office for National Statistics indicated that UK consumer price inflation for May stood at 3.4 per cent, well above the BoE’s 2 per cent target. The central bank anticipates CPI inflation to hover just below 3.5 per cent for the remainder of the year, with a brief spike to 3.7 per cent in September.
Following the MPC’s decision, the pound remained unchanged against the dollar at $1.341.
Traders kept their expectations for further rate cuts largely unchanged, foreseeing two quarter-point reductions by year-end, as indicated by levels implied by swaps markets.
The BoE stressed that policy was not predetermined, emphasizing its close monitoring of “elevated” inflation expectations.
Given the escalating conflict in the Middle East and the potential impact on oil prices, the MPC pledged to remain “attentive to heightened uncertainties in the economic and geopolitical landscape,” citing recent upticks in energy costs.
The central bank reiterated its commitment to a “gradual and cautious” approach to future rate cuts, a strategy interpreted by investors as indicating quarterly reductions.
Additional reporting by Ian Smith