Bank of England holds interest rates at 4.25% amid inflation fears

The Bank of England (BoE) has kept interest rates untouched at 4.25% amid geopolitical uncertainty and surging food and oil prices.
Members of the Monetary Policy Committee (MPC) voted by 6-3 to keep borrowing costs on hold following their reduction announced in May.
Three members — Swati Dhingra, Dave Ramsden and Alan Taylor — backed a quarter of a point cut to 4%. Dhingra and Taylor had backed a half a point reduction at the meeting in May.
It means the Bank has voted to cut rates at every other meeting since it started easing borrowing costs last August, from a peak of 5.25%.
The governor of the Bank of England Andrew Bailey said the world had become 'highly unpredictable' as interest rates were held at 4.25%.
Read more: UK inflation slows to 3.4% in May as transport costs ease
Bailey said: 'Interest rates remain on a gradual downward path, although we've left them on hold today.
'The world is highly unpredictable. In the UK we are seeing signs of softening in the labour market.
'We will be looking carefully at the extent to which those signs feed through to consumer price inflation.'
The decision had been widely anticipated by markets, particularly following inflation data for May showing prices rising 3.4% — well above the Bank's 2% target.
Investors and economists saw little chance of a rate cut, especially with tensions in the Middle East escalating and pushing oil prices higher.
Traders bet there is an 84% chance that policymakers will cut from 4.25% to 4% at the next meeting. The chances stood at 77% on Wednesday.
This would remain in line with the Bank's pattern of reducing rates at every other meeting since it started lowering from a peak of 5.25% last August.
Vivek Paul, UK chief investment strategist at BlackRock Investment Institute, said:'The Bank's decision to hold firm today shows that, much like the weather, inflation is too hot to feel comfortable about cutting rates just yet. Services inflation showed signs of easing in yesterday's CPI print, but remains stubbornly high.
Read more: FTSE 100 LIVE: Stocks slip as Bank of England holds interest rates
"Among developed market central banks, the Bank of England still faces one of the toughest trade-offs between growth and inflation. Uncertainty remains around tariff impacts, and the recent escalation of tensions in the Middle East has added fresh uncertainty."
Indeed, the Monetary Policy Committee (MPC), led by governor Bailey, was expected to maintain a cautious tone even before the outbreak of conflict between Israel and Iran sent oil prices soaring by 8.5% in less than a week.
Zara Nokes, global market analyst at JPMorgan Asset Management, said UK inflation is still 'uncomfortably high'.
"Escalating tensions in the Middle East, and the upward pressure this is putting on oil prices, will only add to the Bank of England's concern about easing rates too quickly," she said.
"The Monetary Policy Committee will face a tougher choice when meeting again in August, given the combination of still-sticky inflation and evidence that the labour market is quite clearly cooling. A deterioration in the labour market should, in theory, put downward pressure on inflation, but until there are clear signs of this in the hard data, the Bank should be careful not to claim victory over inflation quite yet, not least because of the uncertain geopolitical climate.'
Threadneedle Street admitted that the Middle East conflict is pushing up energy prices. "Energy prices have risen owing to an escalation of the conflict in the Middle East. The Committee will remain sensitive to heightened unpredictability in the economic and geopolitical environment, and will continue to update its assessment of risks to the economy," it said.
Brad Holland, director of investment strategy at Nutmeg, said: 'It was always going to be an uphill battle for the Bank of England to justify a back-to-back rate cut following last month's decision to bring down rates. Services inflation and wage growth continue to run hot, and external factors such as tariffs and global conflict have created too many 'unknowns'. The Bank is showing caution.
'For now, the question weighing on many people's minds is: how long will it take for interest rates to fall further? It is believed by many that the 'neutral rate', where the UK economy can deliver price stability, lies around 3%. But, we could be a long way away from this target with the market currently expecting the base rate to fall to 3.5% by April 2026. Getting services inflation down to a more manageable level is crucial to lowering interest rates.
'Many expect the next rate cut to take place in the early autumn when trends in services prices will be clearer, and the impact of the international situation will be better understood. Arguably, the Bank of England is playing for time.'
Read more: Number of million-pound homes for sale in Britain doubles since 2019
The UK economy contracted 0.3% in April, marking the sharpest monthly decline since 2023. Analysts cited the lingering effects of US president Donald Trump's trade tariffs and a temporary hit from the expiration of the stamp duty holiday.
Lindsay James, investment strategist at Quilter, said: 'Events of recent weeks means all hopes of the BoE moving faster to cut interest rates have been extinguished. As such, it comes as very little surprise that the MPC has chosen to hold rates at 4.25%. Although we had three votes for a cut, ultimately inflation continues to drive decision making, and with the headline figure remaining elevated earlier this week, there is very little movement just now for the committee, and that is before global events are factored in.
'We are still awaiting the full impact of Donald Trump's tariffs to show up in the prices of goods. We are approaching the end of the 90-day pause on reciprocal tariffs, and what happens from there is really anyone's guess. Even with the US-UK trade deal, the raft of tariffs on other nations would likely be felt in some form here too. In particular, Europe looks the least likely to cave to Trump, and given it is the UK's biggest trading partner, there will be knock-on effects."
The BoE said that underlying UK GDP growth "appears to have remained weak", and the labour market has "continued to loosen". It also warned that there was a "two-sided risk to inflation", as weak demand could pull it down, but higher food prices could send it higher.
"Consumer price inflation is expected to remain broadly flat at current rates throughout the remainder of the year before falling back towards target next year," the BoE said.
Despite four rate cuts over the past year, the BoE is proceeding cautiously after aggressive tightening through 2022 and 2023 to combat inflation. Markets currently expect two more 25 basis-point cuts by the end of 2025.
Read more: Pound treads water as Bank of England holds interest rates
Matthew Ryan, head of market strategy at Ebury, said: 'For now, we are sticking by our call for just two further cuts to the base rate between now and year-end, possibly in August and November, when the latest Monetary Policy Reports will be released.
'We don't believe that the MPC will entertain the idea of lowering rates more aggressively than that just yet."
The Bank rate is a key reference point for borrowing and savings products across the UK, affecting everything from mortgage costs to interest on savings accounts.
Kevin Mountford, co-founder of Raisin UK, warned of potential volatility in mortgage markets. 'This decision has wide implications for consumers. While Zoopla's House Price Index reported healthy housing sales in May, fixed rates look like they could become unsettled. Consumers looking to borrow should take advantage when they see a good option for them," he said.
'Any decision that has a financial impact for consumers, like buying a new home, is of course a big one and with a high cost of living showing little sign of ease, it can be easy to get stuck in the day to day. The current rates provide consumers with little reassurance but it is essential for people to take a step back and think about the bigger picture."
Frances Haque, chief economist at Santander UK, said: 'Aspiring homeowners and those already on the ladder could expect to see mortgage rates continue to hover between the top end of the threes or lower end of the fours. For this to change significantly we'd need to see changes in economic data — and as ever, that could see mortgage rates go up as well as down.
"While these may pose bumps in the road for buyers, the traditional increase in home moving we see during the summer will likely continue to drive demand for properties as we enter Q3 which, coupled with affordability improvements, means we expect the 2025 mortgage market will continue to grow.'
Across the Atlantic, the US Federal Reserve opted to leave borrowing costs unchanged on Wednesday. The Fed left its outlook for interest rates this year unchanged, with its 'dot plot' indicating another two cuts.
Seema Shah, of Principal Asset Management, said that decision was 'somewhat surprising'.
She said: 'Any change in this year's dot plot would have been interpreted as a signal that the Fed has a clear plan about its future policy path, when actually the likely truth is that, with the economic outlook still very much shrouded in uncertainty, the Fed is unsure of how things will pan out.'
However, some central banks are lowering borrowing costs. The Swiss National Bank (SNB) cut its interest rate to zero on Thursday in response to falling inflation and a stronger Swiss franc. The SNB reduced its policy rate from 0.25%, as had been expected by markets.
Norway's central bank surprised markets today by announcing a quarter-point interest rate cut amid the 'uncertain' economic outlook. Norges Bank lowered borrowing costs from 4.5% to 4.25% — its first reduction in five years.
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