The Bank of England has kept its benchmark interest rate at 4.25%, but hinted that a cut could be on the horizon as early as August, amid growing signs of a weakened UK economy and rising global risks.
While Governor Andrew Bailey acknowledged that inflation is now on a gradual downward path, he warned that the world remains “highly unpredictable”, with escalating geopolitical tensions—particularly in the Middle East—threatening to derail the UK’s fragile economic recovery.
“In the UK we are seeing signs of softening in the labour market,” Bailey said. “We will be looking carefully at the extent to which those signs feed through to consumer price inflation.”
The Bank’s Monetary Policy Committee (MPC) said it remained “sensitive” to developments in the Israel-Iran conflict, which has driven oil prices up by 26% and gas prices by 11% since the MPC’s last meeting in May. Further spikes in energy prices could reignite inflation and complicate decisions around future rate cuts.
The decision to hold interest rates came despite inflation remaining above the Bank’s 2% target and at its highest level in over a year. While some on the MPC are reportedly pushing for an earlier cut, the majority opted to wait, citing a complex mix of domestic and international pressures.
Domestically, the outlook remains uncertain. After a strong start to 2025, the UK economy contracted sharply in April, highlighting the volatility of the current recovery. Although the Bank has slightly upgraded its overall economic expectations, it noted that “underlying growth remains weak”.
At the same time, there are signs that wage growth is slowing—a development that may help bring inflation under control—but unemployment is also rising, with businesses reluctant to hire or replace staff in the face of economic uncertainty.
Despite these warning signs, the Bank appears cautiously optimistic that it will be able to begin lowering rates later this year, especially if inflationary pressures continue to ease and growth remains subdued.
Markets are now pricing in a possible 0.25 percentage point cut in August, with a second cut potentially following by the end of 2025.
For now, the message from Threadneedle Street is clear: the Bank is prepared to act, but only when the balance of risks allows. With energy prices volatile, global tensions high, and growth stalling at home, policymakers are walking a fine line between supporting the economy and keeping inflation in check.
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Bank of England warns of ‘elevated’ global uncertainty after leaving interest rates on hold