The Bank of England has lowered interest rates to 4.25%, but it has not signaled a quickening of its easing cycle. Market expectations had built up for indications that the committee was ready to shift gears, with pricing suggesting two additional cuts in the next three meetings.
This would represent a departure from the established pattern of quarterly rate reductions that the Bank has followed so far. However, the Bank of England maintained its existing language, indicating that any future cuts would be “gradual and careful.” Any change to this wording could have suggested an imminent rate cut, particularly in June, a timing the Bank appears hesitant to commit to at this point.
This cautious stance, along with two committee members voting against the rate change, led to a reduction in the anticipated easing over the next year. One of the factors influencing the Bank’s decision is the perception surrounding the impact of tariffs on the economy.
Although global growth uncertainty is a concern, the direct effects of tariffs have been limited. Additionally, the Bank has made minor revisions to its growth and inflation forecasts, only slightly adjusting its headline CPI predictions due to falling oil prices.
As such, the expectation remains for the Bank to continue with quarterly cuts, with the next anticipated adjustment potentially in August. Nonetheless, there is a possibility that the BoE might adjust its stance sooner.
The upcoming release of April’s services inflation data is a substantial variable that could impact the Bank’s outlook. Previous volatility in this data could influence the committee’s decisions in the near term.
Sterling experienced an initial decline due to the split in voting but later recovered, reflecting confidence in the Bank’s cautious approach. The anticipated UK-EU summit on May 19 may further support sterling, as improving UK-EU relations could enhance growth prospects and fiscal flexibility, potentially benefiting the currency long-term.