BOE PREVIEW: rates on hold as markets eye CPI and forward guidance

The Bank of England's Monetary Policy Committee (MPC) is set to announce its next interest rate decision on Thursday, 19 June 2025. The current Bank Rate stands at 4.25%, following a 25 basis point cut in May.

Interest Rate Outlook

Market consensus strongly favours no change at this meeting, with implied pricing assigning a 90% probability that the Bank Rate remains at 4.25%. This expectation is underpinned by ongoing inflationary pressures, despite signs of a cooling economy.

Headline CPI rose to 3.5% in April, well above the 2% target and is expected to remain elevated in the near term. Private-sector wage growth also remains strong, adding to the Bank's inflation concerns.

Economic data continues to present a mixed picture. UK GDP shrank 0.3% in April, more than the expected 0.1% decline, attributed largely to the impact of U.S. tariffs and increased national insurance contributions. The unemployment rate ticked up to 4.6%, while job vacancies dropped by 63,000—marking the steepest decline since mid-2023.

Crucially, the May CPI report, due just one day before the MPC meeting, will be a key determinant of the tone adopted. Forecasts suggest inflation will remain between 3.5% and 3.7%, aligning with the BoE’s projection of a Q3 peak before gradual moderation. A higher-than-expected reading may delay further cuts; a softer print could give policymakers room to move sooner.

Markets currently price in two additional 25 bp cuts by year-end, potentially bringing the Bank Rate to 3.75%, with a 65% chance of the next cut occurring in August, data permitting.

Market Expectations

With a hold decision widely expected, forward guidance and tone will be the key catalysts for market reaction:

• A neutral or mildly hawkish stance—where the MPC reiterates its data-dependence but highlights lingering inflation risks—could support the pound, especially against the EUR and USD.
• This could also lead to a modest rise in gilt yields, particularly at the short end of the curve, as markets adjust expectations around the timing of cuts.
• For UK equities, particularly the FTSE 100, confirmation that borrowing costs may ease soon would likely prove constructive, especially for rate-sensitive sectors.

 

Less likely but still plausible scenarios include:

• A dovish surprise, where the MPC signals imminent cuts due to growth risks, would likely see sterling weaken, gilt yields fall, and equities rally.
• Conversely, a hawkish tilt, emphasizing persistent inflation and pushing back against cuts, could weigh on equities while lifting the pound and yields.

Conclusion

While the Bank of England is expected to hold rates steady in June, the updated Monetary Policy Summary and minutes will provide insights into the MPC's assessment of inflationary pressures and economic growth. The central bank's cautious approach reflects the delicate balance between supporting economic activity and ensuring inflation returns to its target.