Bank of England cuts rates, signals gradual and careful monetary easing

Summary

• The Bank of England (BoE) delivered a widely anticipated 25 bps rate cut at today's announcement, bringing the policy rate down to 4.25%. Between the somewhat balanced policymaker vote split, mixed commentary on economic trends, and updated economic projections that did not contain any major surprises, we view the decision as broadly neutral. In terms of forward guidance, BoE officials communicated a desire to maintain a gradual and cautious approach towards further easing.

• In terms of recent economic trends in the United Kingdom, we have yet to see data that would suggest a deviation from this gradual rate cut path. The U.K. economy started 2025 in reasonably good shape, and we see relatively limited impact on the U.K. economy from higher U.S. tariffs. There are areas of caution—such as some degree of fiscal consolidation and a mixed picture for business investment—but we believe policymakers would likely only adopt a shift in stance if these developments were to result in sharply slower overall economic growth.

• As for wage and price growth developments, the picture is somewhat mixed. While in our view the direction of wage and labor cost pressures is broadly favorable, some measures of pay growth are still elevated. On the price front, the news has been more encouraging, with March CPI inflation surprising to the downside. While disinflation progress is noticeable, services inflation is persisting for now, which we see as consistent with a more gradual pace of rate cuts.

• We maintain our view for a once-per-quarter BoE rate cut pace through Q1-2026. We see 25 bps rate cuts in August, November, and February, with the policy rate expected to reach a low of 3.50% by early next year. Given our expectation for only gradual BoE easing, combined with anticipated U.S. economic weakness later this year, we see limited pound weakness against the dollar through the end of this year. However, more pound weakness could be seen in 2026, as the Fed concludes its easing cycle and the U.S. economy recovers.

Bank of England takes further step along its monetary easing path

The Bank of England (BoE) delivered a widely anticipated 25 bps rate cut at today's announcement, bringing the policy rate down to 4.25%. The accompanying statement and updated projections were relatively balanced, which we view as consistent with the BoE maintaining a gradual pace of rate cuts for the time being.

Looking more closely at the statement itself, the first balanced element was the 5-2-2 vote split. That is, five policymakers voted for the 25 bps rate reduction, while two policymakers voted for a larger 50 bps cut and two voted for no change. In terms of the other elements of the statement, the BoE said “underlying UK GDP growth is judged to have slowed since the middle of 2024, and the labor market has continued to loosen.” The central bank also observed that “progress on disinflation in domestic price and wage pressures is generally continuing ... although indicators of pay growth remain elevated, a significant slowing is still expected over the rest of the year.”

Importantly, the BoE did not offer any significant adjustment to its future policy guidance. The central bank reiterated that a “gradual and careful approach” to the further withdrawal of monetary policy restraint remains appropriate. Additionally, the BoE also said monetary policy will need to “remain restrictive for sufficiently long” until the risks to inflation returning sustainably to the 2% target in the medium term have dissipated further.

Turning to the BoE's updated economic projections, there is little to suggest an acceleration in the pace of rate cuts. The forecasts are based on an assumption that the BoE's policy rate will decline gradually to 3.50% by Q2-2026. With respect to economic growth, U.K. GDP is expected to jump 0.6% quarter-over-quarter in Q1-2025 before slowing sharply thereafter. In terms of its overall GDP forecasts, the BoE raised its growth forecast for 2025 to 1% (previously ¾%), lowered its growth forecast for 2026 to 1¼% (previously 1½%), and kept its 2027 growth forecast at 1½%.

Meanwhile, the central bank lowered its CPI inflation forecast for 2025, 2026 and 2027. For a start, the BoE now sees a lower inflation peak of 3.5% in Q3-2025, compared to a previous forecast peak of 3.7%. CPI inflation is expected to return to the 2% target by early 2027, and to fall slightly below that target at 1.9% in both Q2-2027 and Q2-2028. The slowdown of inflation is predicated, in part, on a significant slowing in wage growth over the rest of this year.

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