The BoE lowered its policy rate to 4.25%

At its May meeting, the Bank of England (BoE) executed a 25 basis point reduction in its benchmark interest rate, bringing it down to 4.25%, a move that aligned with widespread market forecasts.

However, the decision highlighted a significant divergence of opinion within the Monetary Policy Committee (MPC). While a majority of five members voted in favor of the 25 basis point cut, dissenting voices emerged: Dhingra and Taylor advocated for a more aggressive 50 basis point reduction, while Mann and Pill preferred to maintain the status quo and voted to keep rates unchanged. This split underscores the ongoing debate surrounding the appropriate pace of monetary easing in the face of persistent inflationary pressures and evolving economic conditions.

BoE policy statement takeaways

• The Bank of England stated that “a gradual and careful approach to further withdrawal of monetary policy restraint remains appropriate,” signaling a cautious stance on future rate adjustments.
• The BoE reiterated that “monetary policy will need to continue to remain restrictive for sufficiently long until the risks to inflation returning sustainably to the 2% target in the medium term have dissipated further,” emphasizing its commitment to achieving its inflation target.
• The Bank of England emphasized that monetary policy is not on a pre-set path, retaining flexibility to respond to evolving economic data and unforeseen circumstances.
• The BoE noted that an increase in trade tariffs implies weakened global growth prospects, but the drag on UK growth and inflation is likely to be smaller than the global impact.
• BoE Governor Andrew Bailey stated that inflation pressures are easing, which enabled the bank to cut rates at this meeting.
• Governor Bailey also cautioned that the past few weeks have demonstrated the unpredictability of the global economy, reinforcing the need to adhere to a gradual and careful approach to further rate cuts.
• The BoE indicated that progress on domestic disinflation is generally continuing, and pay growth is expected to decelerate significantly over the remainder of 2025.
• The MPC considered a range of possibilities for how domestic inflation pressures could evolve and the circumstances that might necessitate a change in the course of policy, highlighting the committee’s active monitoring of economic indicators.
• The BoE’s forecast projects CPI inflation at 2.4% in one year’s time (compared to the February forecast of 3.0%), based on market interest rates and the modal forecast.
• The BoE’s forecast projects CPI inflation at 1.9% in three years’ time (unchanged from the February forecast), based on market interest rates.
• The BoE’s forecast projects CPI inflation at 1.9% in two years’ time (compared to the February forecast of 2.3%), based on market interest rates.
• The BoE forecasts GDP growth of +1.0% in 2025 (up from the February forecast of +0.75%), +1.25% in 2026 (down from February’s +1.5%), and +1.5% in 2027 (unchanged from February), all based on market rates.
• The BoE forecasts an unemployment rate of 4.7% in Q4 2025 (up from the February forecast of 4.5%), 5.0% in Q4 2026 (up from February’s 4.7%), and 5.0% in Q4 2027 (up from February’s 4.8%).
• The BoE estimates private sector wage growth, excluding bonuses, at 3.75% year-over-year in Q4 2025 (unchanged from February), 2.75% in Q4 2026 (down from February’s 3%), and 2.75% in Q4 2027 (down from February’s 3%).
• The BoE observed that market rates imply less BoE loosening than in February, showing a bank rate at 3.7% in Q4 2025, 3.6% in Q4 2026, and 3.6% in Q4 2027 (compared to February’s projections of 4.2% in Q4 2025, 4.1% in Q4 2026, and 4.0% in Q4 2027).
• The BoE estimates GDP growth of +0.6% quarter-over-quarter in Q1 (significantly higher than the March forecast of +0.25%), attributing the surge largely to erratic factors with underlying growth remaining around zero; the bank anticipates +0.1% quarter-over-quarter growth in Q2, noting downside risks.
• The BoE expects inflation to peak at 3.5% in Q3 on a quarterly basis, slightly lower than the previous forecast of 3.75%.

This section below was published as a preview of the Bank of England’s (BoE) interest rate decision at 06:00 GMT.

• The Bank of England is widely anticipated to lower its policy rate to 4.25%.
• UK inflation figures, while showing signs of moderation, remain considerably above the BoE’s targeted level of 2%.
• The GBP/USD exchange rate has retreated from recent peaks, currently trading around the 1.3300 level.

The Bank of England (BoE) announced its latest monetary policy decision on Thursday, marking its third rate-setting meeting of 2025. The decision was closely watched by financial markets and economists alike, given the ongoing challenges of balancing inflation control with supporting economic growth.

As anticipated by the markets, the central bank decided to reduce its benchmark interest rate by 25 basis points, bringing it to 4.25% after holding steady at its March 20 meeting. This move reflects the BoE’s assessment of the current economic landscape and its efforts to steer the economy towards its inflation target.

The Monetary Policy Committee’s (MPC) decision was accompanied by the release of the meeting Minutes and the Monetary Policy Report (MPR), providing valuable insights into the internal discussions and considerations that shaped the policy outcome. Furthermore, Governor Andrew Bailey addressed reporters in a post-decision press conference. His remarks were carefully analyzed for any subtle shifts in tone, particularly concerning inflation risks, the potential impact of trade tariffs, and the projected timing of future rate adjustments.

With the rate cut largely factored into market expectations, the primary focus now rests on the Bank’s forward guidance and its updated economic outlook. These elements serve as crucial signals that can significantly influence market sentiment and shape expectations for the trajectory of monetary policy in the coming months. Investors and analysts will be scrutinizing the BoE’s communications for clues about the pace and magnitude of future rate adjustments, as well as its overall assessment of the risks and opportunities facing the UK economy.