Bank of England keeps rates steady, but forward guidance remains clouded

The Bank of England (BoE) left interest rates unchanged at 4.25% during its latest policy meeting, aligning with widespread expectations. However, the vote split—6 in favour of holding and 3 advocating a 25 basis point cut—was more dovish than anticipated, with markets previously pricing in a 7-2 split. This tilt suggests a growing internal division as policymakers weigh persistent inflation against sluggish economic growth.

Governor Andrew Bailey emphasized that while the current rate remains “sufficiently restrictive,” emerging signs of labour market weakness provide some scope for easing—should this trend translate into softer inflation. He maintained that interest rates remain on a “gradual downward path,” reinforcing a dovish undertone even amid the decision to hold rates steady in June.

Nonetheless, the broader economic landscape remains fraught with uncertainty. Rising energy prices—exacerbated by escalating tensions in the Middle East—could prolong inflationary pressures, complicating the BoE’s path toward easing. The Monetary Policy Committee (MPC) acknowledged this risk, indicating it will remain responsive to shifting geopolitical dynamics and economic volatility, which could necessitate changes in its forward guidance.

As of Wednesday, market pricing indicated a high likelihood of a rate cut in September, with an 80% chance of a 50 basis point reduction—particularly if no action is taken in August. However, sentiment has since shifted. Current market pricing now fully reflects only a 25bps cut by September (down from 70bps earlier in the week), and expectations for August remain evenly split. This adjustment likely stems from concerns over energy-driven inflation and Bailey’s comments regarding the smaller-than-expected global GDP impact from tariffs, as observed in May.

The BoE’s messaging ultimately delivered a blend of dovish intent and cautious realism. While there is a clear acknowledgment of the need for lower rates amid weak growth, the potential for resurgent inflation and resilient global demand due to tariffs clouds the outlook. This ambiguity has left markets uncertain.

The British pound initially dipped on the announcement before recovering to trade flat against the US dollar. Gilt yields mirrored this movement, falling before rebounding. Meanwhile, the FTSE 100 came under renewed bearish pressure. Investors, hoping for a clearer trajectory from the BoE, may now find themselves grappling with uncertainty.

GBP/USD, UK 10-year yield, and FTSE 100 1-minute charts

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