The Bank of England (BoE) kept interest rates at 4.25% in June, citing global uncertainty, energy-price risks, and lingering wage pressures as reasons for caution, though markets still expect up to two rate cuts later this year.
The vote, however, revealed a slightly more dovish tilt than expected, with three members of the Monetary Policy Committee (MPC) favouring a 25-basis-point cut—a sign that momentum may be building toward an easing cycle later this year.
“Market expectations were low for this Bank of England meeting,” said Marcus Jennings, Fixed Income Strategist at Schroders. “In the event, it proved to be one of the less volatile moments for the gilt market.” He noted that the Bank’s consistent messaging around a gradual approach to cuts aligned with recent macroeconomic data.
Tom Stevenson, Investment Director at Fidelity International, highlighted the opposing forces facing the central bank. “The UK economy contracted sharply in April, wage growth has slowed, unemployment is creeping up—but inflation remains stubbornly above target,” he said. Inflation held at 3.4% in May, well above the Bank’s 2% target.
“Services inflation, a key measure for the Bank, slowed to 4.7% in May, but remained higher than many would like,” Stevenson said, adding that geopolitical tensions in the Middle East could drive energy costs higher, further complicating the inflation outlook.
The split vote—6 to hold, 3 in favour of a cut—was more dovish than markets had priced. According to Esther Watt, Bond Strategist at Evelyn Partners, recent labour market softness—rising unemployment and slower wage growth—may have shifted sentiment within the MPC. The Bank, however, reiterated its commitment to a “gradual and careful” approach to easing.
The latest data suggests that the labour market is weakening more quickly than expected. Unemployment rose to 4.6% in the three months to April, and payrolled employees fell sharply. “This gives the Bank more confidence to continue easing,” noted Jennings. Still, there are no guarantees on timing, especially without fresh economic forecasts accompanying the June meeting.
Esther Watt also pointed to modest tailwinds from trade agreements with the US, India, and the EU, which offer limited but welcome support for the UK’s growth outlook. Still, global policy uncertainty and geopolitical risk continue to weigh on the broader economic picture.
From a market standpoint, expectations for lower UK rates appear to be building. “We think the market is underestimating the risk of a more aggressive easing cycle,” said Mathieu Savary, Chief European Strategist at BCA Research. “That keeps us biased toward lower UK rates, continued outperformance in gilts, and downside for sterling against the euro.”
As Stevenson concluded: “Small, staggered rate cuts are in vogue for now, but we are only halfway through an eventful year.”
