Bank of England warns of “raised” global uncertainty after putting interest rates on hold
The Bank of England kept its benchmark interest rate at 4.25%, but suggested a possible cut in the August range, a growing sign of a sign of a weakening UK economy and increased global risks.
While Governor Andrew Bailey acknowledged inflation was gradually moving down the road, he warned that the world remains “highly unpredictable” and that geopolitical tensions continue to escalate, especially in the Middle East – threateningly breaking away from Britain’s fragile economic recovery.
“In the UK, we see signs of softening in the labour market,” Bailey said. “We will look closely at the extent to which these signs stem from consumer price inflation.”
The bank’s Monetary Policy Committee (MPC) said the development of the Israel-Iran conflict remains “sensitive” since the last MPC meeting in May. Further peaks in energy prices could restart inflation and complicate future decisions to cut tax rates.
Although inflation is still above the bank’s 2% target and remains at its highest level for more than a year, the decision to hold interest rates is still being made. Some on MPC are reportedly pushing for earlier cuts, but most choose to wait, citing a complex combination of domestic and international pressures.
At home, the outlook remains uncertain. At the beginning of 2025, the UK economy signed a sharp contract in April, highlighting the current volatility in recovery. Although the bank slightly upgraded its overall economic expectations, it noted that “potential growth remains weak”.
Meanwhile, there are signs that wage growth is slowing – a development that may help control inflation, but unemployment is also increasing, and companies are reluctant to hire or replace employees in the face of economic uncertainty.
Despite these warning signs, the bank seems cautiously optimistic that it will be able to start lowering interest rates later this year, especially if inflationary pressures continue to ease and growth remains soft.
Now, the market is priced at 0.25 percentage points in August, and the second cut is likely to take place by the end of 2025.
At present, the news from Threadneedle Street is clear: banks are ready to take action, but they can only take action if risks allow. With energy prices fluctuating, global tensions high, and growth at home stagnation, policymakers have a good line between supporting the economy and maintaining inflation.
