UK interest rates kept on hold with Bank alert to ‘highly unpredictable' world

South Wales Guardian

6 hours ago

The Bank's Monetary Policy Committee (MPC) decided to keep rates unchanged at 4.25%.
In a split vote, with six members opting to hold and three preferring to cut, the MPC said a 'gradual and careful approach' to reducing borrowing costs continued to be the right course of action.
Bank governor Andrew Bailey said: 'Interest rates remain on a gradual downward path, although we've left them on hold today.
'The world is highly unpredictable.'
He added that there were 'signs of softening in the labour market' – referring to indicators including slower hiring and wage growth easing – which were being closely watched to see how far they feed into UK inflation.
The committee said it was alert to concerns about conflict in the Middle East, which has escalated in recent days with attacks between Israel and Iran.
In the minutes of the MPC's meeting, it noted that there had been 'rapid geopolitical developments', adding: 'Energy prices had risen owing to an escalation of the conflict in the Middle East.
'The committee would remain vigilant about these developments and their potential impact on the UK economy.'
It echoes similar remarks made by the US's central bank which also opted to keep interest rates on hold on Wednesday.
Global oil and natural gas prices have surged in recent weeks, which threatens to push up energy costs in the UK.
Furthermore, the MPC noted that Donald Trump's tariff policy was posing risks to global trade and continuing to create uncertainty.
But it said that deals struck between the US and other countries, including the UK, meant that the direct impact of the 'trade shock' on global growth could be smaller than it had forecast last month.
Meanwhile, the decision to keep rates on hold came as UK Consumer Price Index (CPI) inflation remained above the Bank's 2% target level, coming in at 3.4% last month.
The jobs market was also starting to cool, with the rate of unemployment ticking up and pay growth starting to ease.
The Bank said its network of agents had found that cost pressures from the beginning of April – including national insurance contributions rising – had put pressure on firms to recover them by raising prices.
As well as price hikes, it noted that businesses had been leaning on other actions to mitigate costs, including reducing their workforce, staff hours, salaries, and absorbing into profits.
The Monetary Policy Committee voted by a majority of 6-3 to keep interest rates at 4.25%
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It also pointed to waning business sentiment amid weak growth in the UK economy, with demand not expected to recover until 2026.
Signs of a weakening jobs market and economic growth indicates that a rate cut could be on the table when the committee next meets in August.
Matt Swannell, chief economic adviser to the EY Item Club, said three MPC members voting for a cut was 'probably a sign that the MPC has become slightly more concerned about the labour market than it was in May'.
'This only raises the bar for the MPC to break from its cut-hold tempo at its August meeting and opens the door slightly to rate cuts potentially speeding up in the latter half of this year,' he said.
Other experts pointed out that the Bank was having to weigh up a cooling labour market with growing pressures on inflation stemming from global developments.
James Smith, developed market economist for ING, said some policymakers had a 'beady eye' on oil prices and were 'wary of a repeat of 2022, where a rise in energy prices turned into a much wider and more persistent services-driven inflation episode'.
He is nonetheless forecasting a reduction in rates in August and again in November.
Rachel Reeves said the Government respected the Bank's decision as she spoke at The Times CEO Summit.
Speaking in central London, the Chancellor said: 'We respect independent economic institutions, and the Bank has got an incredibly important but difficult job to do.
'We want them to set the monetary policy that is appropriate for meeting the inflation target, because we also saw in the last parliament a double-digit inflation which was so challenging for businesses, but also family finances, which also has a knock on impact on business.'
Ms Reeves, a former economist at the Bank, insisted the four interest rates cuts made under Labour were 'a world away from the previous parliament, when interest rates went up so sharply because of the poor economic mismanagement of prime ministers and chancellors'.