Bank of England holds interest rates at 4.25%

The Bank of England has voted to maintain its benchmark interest rate at 4.25%, following its latest Monetary Policy Committee (MPC) meeting, as policymakers weigh the ongoing tug-of-war between slowing economic growth and stubborn inflation.

The decision, reached by a 6–3 majority, marks a pause after two rate cuts earlier this year, in February and May. The three dissenting MPC members favoured a further 0.25 percentage point cut to 4%, reflecting growing concerns over the UK’s weak economic momentum and softening labour market conditions.

The MPC said in its June 2025 Monetary Policy Summary that while inflation has broadly receded from its post-pandemic peaks, it remains above the 2% target, requiring a cautious approach. “There has been substantial disinflation over the past two years,” the statement noted, but emphasised the need for policy to remain restrictive to fully extinguish lingering inflationary pressures.

Inflation remains above target

Headline CPI inflation rose to 3.4% in May, up from 2.6% in March, driven largely by regulated price adjustments and the delayed impact of energy cost increases. Although this uptick was anticipated in the Bank’s May forecast, it reinforces the challenge of navigating a path back to the inflation target.

While the pace of disinflation has slowed, the Bank expects inflation to stay around current levels for the rest of the year, before easing towards target in 2026. Wage growth — a key metric for the MPC — has shown signs of moderation, though the Committee remains alert to how quickly this easing translates into reduced price pressures.

Growth stagnates, labour market loosens

Underlying UK GDP growth has remained subdued, and the labour market is gradually loosening. The MPC noted “clearer signs that a margin of slack has opened up over time,” suggesting reduced inflationary pressure from domestic demand.

Mike Randall, CEO of Simply Asset Finance, said the decision to hold rates may offer “short-term stability, but for most SMEs it doesn’t change the real challenge: securing affordable finance that meets their growth and investment ambitions.”

Uncertain global backdrop

External uncertainties also continue to weigh on the MPC’s outlook. Energy prices have risen amid renewed conflict in the Middle East, and global trade tensions — particularly surrounding potential US tariff changes — add further unpredictability.

Garry White, Chief Investment Commentator at Charles Stanley, said the decision was expected given the latest inflation figures and lingering global uncertainty. “The pace of disinflation is slower than hoped,” he said, adding that the Bank is unlikely to cut further without clearer evidence of easing inflationary pressures.

Outlook: No pre-set path

The MPC reiterated that monetary policy is “not on a pre-set path”, with future rate decisions dependent on evolving economic data. The Committee will remain vigilant on inflation persistence and the balance between supply and demand, with the aim of sustaining progress toward the 2% inflation target.

Analysts now expect any further rate cuts to be gradual, with the Bank treading carefully in the face of fragile growth, sticky inflation, and a volatile global environment.