Bank of England holds rates, warns of labour market strain and energy price risks

The Bank of England (BoE) on Thursday held its benchmark interest rate at 4.25%, as widely expected, citing mounting risks from a cooling labour market and renewed energy price pressures linked to escalating Middle East tensions.The Monetary Policy Committee (MPC) voted 6-3 to maintain the rate, with Deputy Governor Dave Ramsden joining Swati Dhingra and Alan Taylor in calling for a 25-basis-point cut. A Reuters poll of economists had forecast a 7-2 vote.
Governor Andrew Bailey said, “Interest rates remain on a gradual downward path,” but cautioned that future moves would be guided by data, not pre-set direction. “The world is highly unpredictable. In the UK, we are seeing signs of softening in the labour market. We will be looking carefully at the extent to which those signs feed through to consumer price inflation.”
Although the ongoing conflict in the Middle East did not directly influence June’s policy decision, the MPC noted a rise in energy prices and pledged vigilance. “Energy prices had risen owing to an escalation of the conflict. The committee would remain alert to these developments and their impact on the UK economy.”There was some relief on the trade front. The BoE cited last week’s US-China rare-earth export deal and confirmation that certain restrictions on UK trade will be lifted. “The direct impact of the trade shock on world GDP could be smaller than the committee had expected,” it said. However, it warned that ongoing trade policy uncertainty would continue to weigh on the UK economy.

Encouraged by this improved trade outlook, the BoE upgraded its second quarter GDP growth forecast to 0.25%, up from 0.1% in May, providing some support to the UK government’s narrative of stabilising economic foundations. Nonetheless, the Bank reiterated that underlying growth remained weak.

The MPC continues to tread a fine line between elevated inflation and a slowing economy.

Also Read: US Federal Reserve leaves its key rate unchanged but sees two cuts this year

UK consumer price inflation edged up to 3.4% in May, slightly above economists’ expectations of 3.3%, according to data released by the Office for National Statistics (ONS) on Wednesday. The increase was driven largely by a sharp rise in food prices, which recorded their fastest annual gain since early 2024.

Markets had priced in an 80% probability of an August rate cut, with traders expecting two further reductions by summer 2026, taking the Bank Rate to around 3.5%.Globally, the BoE’s decision echoed the US Federal Reserve, which held its benchmark rate in the 4.25%–4.5% range for a fourth consecutive meeting on Wednesday. The European Central Bank has been more aggressive, cutting rates eight times to 2% and signalling that it may be nearing the end of its loosening cycle.

(With Agency Input)