(Commonwealth_Europe) The Bank of England is widely expected to keep interest rates on hold at 4.25% this week, as its policymakers juggle rising geopolitical tensions, sticky inflation, and mixed signals from the domestic economy. The Monetary Policy Committee (MPC) will deliver its decision on Thursday, and markets are largely pricing in a continuation of its cautious, step-by-step approach to easing.
Since August 2024, the central bank has lowered rates four times in response to stubborn inflation and resilient wage growth. But unity among MPC members has started to fray. The May meeting revealed growing divisions within the committee, which has dampened hopes for a more aggressive pace of cuts. Recent weak economic data has sparked renewed speculation that the bank might ease off on further reductions, at least for now.
For some, this week’s decision looks like a straightforward one. George Buckley, an economist at Nomura, said he expects the bank to keep rates where they are. He anticipates a terminal rate of 3.5% by February next year, with three 25 basis point cuts at the Monetary Policy Report meetings. That outlook reflects a slightly faster pace of cuts than the market consensus, suggesting rates might settle at the higher end of the so-called “neutral range.”
The broader backdrop is far from straightforward. Rising oil prices, driven in part by Israeli airstrikes on Iran, have reignited fears of wider conflict in the Middle East, adding to the global uncertainty already stirred up by shifting U.S. trade policies under Donald Trump. At the same time, the pound has strengthened significantly against the dollar, adding another wrinkle to the UK’s inflation outlook.
Closer to home, the picture is murky. The UK economy contracted by 0.3% in April, reversing earlier gains. Wage growth has cooled significantly over the three months to April, and unemployment has edged higher. These signs point to a possible weakening in the labor market, which had previously held up surprisingly well.
However, the MPC continues to prioritize inflation. Initially thought to have jumped to 3.5% in April—its highest in over a year—that number was later revised to 3.4% after a data error involving vehicle tax figures. While not a significant change, it serves as a reminder of just how sensitive the inflation picture remains and how carefully the Bank must interpret the data.
For those watching closely, the expectation is for rates to remain unchanged this week—unless the inflation report holds a surprise. Sarah Coles, personal finance columnist at Yahoo Finance UK, noted that if inflation comes in as expected, and the outlook for two more cuts this year holds, the next step down in rates could be just around the corner.
Paul Dales at Capital Economics agrees that April’s weak GDP numbers won’t be enough to push the Bank into cutting rates just yet but said it’s another argument in favor of a move in August. Sanjay Raja from Deutsche Bank shares a similar perspective, predicting no change this week but a potential shift in stance that could lead to an August rate cut. He still forecasts three rate reductions in 2025—August, November, and December—and a final cut in February to bring the Bank Rate down to 3.25%.
Others see the summer as the likely turning point. Enrique Diaz-Alvarez at Ebury thinks that even if the bank stays on hold this week, we could see a shift in tone, perhaps with two or three committee members voting for a cut. ING analysts echoed that view, saying disappointing labor market figures make an August move more likely, provided there are no major surprises in the next data release. With the current rate still considered restrictive, they expect further reductions later in the year and into 2026, eventually landing at a terminal rate of 3.25%.
Not everyone is convinced, though. Steve Matthews at Canada Life Asset Management said the road ahead may be more gradual than previously thought. He pointed to market pricing suggesting the next move might not come until September—or even later. Global uncertainty, especially around U.S. tariffs and trade policy, is making central banks more hesitant to act decisively.
Meanwhile, across the Atlantic, the U.S. Federal Reserve is also expected to hold rates steady at its meeting next week. Investors will be closely watching the Fed’s updated forecasts to see how it’s interpreting recent signs of economic softening, the ongoing fiscal standoff in Washington, and growing geopolitical tensions. In both London and Washington, central banks seem poised to wait and watch—hoping for clarity in a world that keeps delivering surprises.
