Bank of England Holds Key Rate at 4.25% in Dovish Split Vote

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(Bloomberg) — The Bank of England held interest rates at 4.25% in a more divided vote than expected as policymakers weighed up the UK’s softening jobs market and weak growth against a backdrop of mounting geopolitical tensions.

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In a decision that left rates on course for a potential quarter-point cut in August, six of the BOE’s nine Monetary Policy Committee members voted to leave rates unchanged while three — externals Swati Dhingra and Alan Taylor, as well as Deputy Governor Dave Ramsden — preferred an immediate quarter-point reduction.

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The minutes to the meeting showed that the committee “expected a significant slowing over the rest of the year” in pay growth as the jobs market continues to loosen. Striking a dovish note, it said there were “some greater signs of disinflationary pressures from the labor market.” It left its core guidance unchanged that future rate cuts will be “gradual and careful.”

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Traders added to bets on further interest-rate cuts, fully pricing another two quarter-point reductions in 2025. This repricing saw the pound and gilt yields slip, with the yield on 10-year gilts trading around 4.52% compared to 4.53% before. Sterling fell 0.1% on Thursday to $1.341.

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“Definitely August seems like a done deal,” said Pooja Kumra, senior European and UK rates strategist at TD Securities, on Bloomberg TV. She expects to see a gradual decline in wage and inflation data before the next meeting but cautions they are unlikely to move to cutting consecutively like the ECB, given they are sticking to their “gradual and cautious” approach.

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“Interest rates remain on a gradual downward path,” said Governor Andrew Bailey. “The world is highly unpredictable. In the UK we are seeing signs of softening in the labor market. We will be looking carefully at the extent to which those signs feed through to consumer price inflation.”

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Earlier Thursday, rates were cut elsewhere in Europe, with the biggest surprise coming from Norway. Norges Bank caught economists and traders off guard by delivering its first post-pandemic reduction in borrowing costs, causing the krone to slide. The Swiss National Bank cuts its rate to zero, meanwhile, in a sixth consecutive and widely-expected move. Both central banks pointed to lower inflationary pressures.

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Trump and Iran

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The bank has lowered rates four times since August into steadily building economic and political headwinds that started in April with US President Donald Trump’s global trade war and escalated last week after Israel attacked Iran. The US is preparing for a possible strike on Iran, potentially raising the stakes even further. 

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The committee noted the sharp rise in oil prices since Israel’s attack, which pushed them up more than 10% at one point and is threatening the drive inflation higher. It said it would “remain vigilant about these developments and their potential impact on the UK economy.” 

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There was better news on trade following last week’s US deal with China over rare-earth exports and confirmation that some restrictions on the UK will be dropped. “The direct impact of the trade shock on world GDP could be smaller than the committee had expected,” it said. “Trade policy uncertainty would nevertheless continue to have an impact on the UK.”