Bank of England keeps interest rates at 4.25% but hints at cuts to come

The Bank of England has left interest rates on hold at 4.25%, though the central bank signalled that further cuts in the cost of borrowing were coming later this year after “clearer evidence” of rising unemployment amid a slowing economy.

Six members of the Bank’s nine-member monetary policy committee (MPC) voted to keep rates on hold while three supported a reduction to 4%, adding to the four quarter-point cuts since last August.

The Bank’s governor, Andrew Bailey, said interest rates “remain on a gradual downward path” after “seeing signs of softening in the labour market”. However, he cautioned that the world was “highly unpredictable” and it was difficult to predict when interest rates would next be reduced.

Financial markets expect the MPC to reduce rates at its next meeting in August and again, to 3.75%, before the end of the year.

The economy shrank by 0.3% in April after a 0.7% boost in the first three months of the year, indicating a significant cooling in the outlook for growth in national output, or gross domestic product (GDP).

Vacancy rates have plummeted to pre-pandemic levels, unemployment has increased and wages growth has slowed.

The MPC said in its report that business surveys “continued to point to weak underlying GDP growth” and the Bank’s regional agents had said businesses were reluctant to invest while the outlook was clouded by uncertainty.

A forecast for the rest of the year said growth would be just 0.25% in each quarter, though “slightly higher” than expected in May.

The MPC expects inflation to rise temporarily in the coming months as a result of higher energy prices, and then to fall back later in the year as wage growth weakens.

UK inflation edged down to 3.4% in May from 3.5% in April, according to official figures published on Wednesday, reflecting falls in air fares and petrol prices. But the cost of food showed a marked increase, including a record rise in chocolate prices as a result of poor harvests in key producer countries.

Bailey warned earlier this month that Donald Trump’s tariff war made the outlook for inflation and interest rates more ambiguous, telling MPs: “The path remains downwards, but how far and how quickly is now shrouded in a lot more uncertainty, frankly.”

Since the MPC’s last meeting, the escalating conflict between Israel and Iran has raised concerns about the future path of oil prices. The MPC report said the cost of Brent crude had risen by 26% to $79 a barrel since its previous report in May, “in part reflecting an escalation in the conflict between Israel and Iran”. European natural gas prices had increased by 11%.

It said, however, that the impact of US tariffs appeared to have been less significant than originally feared.

The chancellor, Rachel Reeves, has sought to take some of the credit for the Bank’s rate cuts since Labour came to power last summer, suggesting her prudent fiscal policy has allowed it to act.

Labour will be hoping for further rate cuts later in the year to lower the cost of borrowing for companies and help kickstart economic growth.