The Bank of England Monetary Policy Committee (MPC) voted, with a 2-5-2 split, to cut the Bank Rate by 25 basis points to 4.25%; in this unusual split, two members voted for no change and two others wanted a cut of 50 basis points. While the outcome was widely expected, the means of reaching it raises questions about the future path.
This decision is in contrast to the USA where the Federal Reserve voted to hold its key interest rates in the face of an uncertain economic outlook with inflation edging up thanks to increased tariffs. This relative movement should, all things being equal (which they never are), lead to a weaker Sterling relative to the US Dollar as funds move to seek the best rates of return. The next ECB decision is not until the start of June.
The UK decision comes despite the Bank forecasting that Consumer Price Inflation will rise to 3.7% in September, mainly due to higher energy prices that will be reflected in the April figures (predicted to be 3.4%); however, it is also worth noting that their latest inflation forecast is a little lower than in their February report. This is notable as the Governor of the Bank, Andrew Bailey, noted that the cut in interest rates was due to lower.
The Governor indicated that future rate cuts would be “gradual and careful”, suggesting that the recent trend of alternating between “cut” and “hold” is likely to continue for at least the next two meetings (19th June and 7th August). Our colleagues at Oxford Economics are still expecting two more cuts during 2025, which is consistent with this pattern.
The latest meeting included the quarterly Monetary Policy Report with the updated forecasts; although the Bank cut its expectations for UK GDP, it was only downgraded by 0.25% compared to February and leaves them significantly higher than the consensus view. Bank officials explained this as being because they expect the negative impact of US tariffs would be mitigated by looser financial conditions and lower than previously expected oil and fuel prices (the UK-US trade deal will help in this regard).
This report includes an update on business conditions by the Bank’s local Agents based on information gathered in the 6 weeks to the end of March; therefore, this was before the tariff announcements on 2nd April but the views have been complemented by focused conversations to understand UK firms’ early reactions.
They report that many contacts are still citing pressures such as a weak demand outlook and higher labour costs as reasons to defer investment. This is coupled with uncertainty about the global outlook and the impact on domestic demand which has increased since the previous report. There are exceptions including from sectors with strong demand such as aerospace and defence, and there are significant utilities infrastructure investments commencing or planned.
A similar pattern is seen in exports for manufacturers; demand from the Euro-zone is reported to be weak and only partially offset by growth from the US and elsewhere. Again, there are exceptions noted for the defence and aerospace sectors.
Fewer manufacturing contacts expect to see growth in 2025 with low business confidence and the consequences of US tariffs expected to limit activity. The continuing uncertainty weighing on investment decisions is reducing demand for capital and intermediate goods – again, defence and aerospace are mentioned as exceptions to this trend.
You can access the Monetary Policy Report on the Bank of England website at https://www.bankofengland.co.uk/monetary-policy-report/2025/may-2025; by scrolling down to the report section of this page, you can use the side menu to jump to the section on the Agents’ update on business conditions (box E). The minutes of the MPC meeting are published at https://www.bankofengland.co.uk/monetary-policy-summary-and-minutes/2025/may-2025.