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Bank of England Governor Andrew Bailey believes the path of UK interest rates remains downward but ‘uncertainty’ has risen since the central bank’s last batch of forecasts in May. Speaking after the BoE cut rates by 25 basis points in a knife-edge decision that required two rounds of votes, Bailey said in a press conference that risks on both side of the spectrum as far as inflation goes are ‘very apparent’. On one side of the equation ‘upside risks around medium-term inflationary pressures have moved slightly higher’ since May, the BoE said, though Bailey noted UK consumption and economic growth is tepid, which could put downside pressure on inflation. May was when the BoE last released its monetary policy report of projections. According to the Office for National Statistics last month, the UK annual consumer price index inflation rate accelerated to 3.6% in June from 3.4% in May. According to FXStreet-cited market consensus, it had been expected to remain at 3.4% in June. The BoE believes consumer price inflation will peak at 4.0% in September, ‘a slightly higher profile than in the May report’, though Bailey said there are ‘good reasons to think’ that the acceleration in price pressure will eventually ease. Threadneedle Street believes inflation will return to the 2% target in the second quarter of 2027. The quarter point cut by the BoE on Thursday taking the bank rate to 4.00% from 4.25% was widely expected. But the split among Monetary Policy Committee members proved surprising, requiring an unprecedented second round of voting. Five members of the nine strong MPC, including BoE Governor Bailey, voted for the 25 basis points reduction. Bailey was joined by Sarah Breeden, Swati Dhingra, Dave Ramsden and Alan Taylor. Four MPC members - Megan Greene, Clare Lombardelli, Catherine Mann and Huw Pill - voted to keep rates on hold. The BoE said Taylor would have preferred to reduce bank rate by a heftier 50 basis points but in a second round of voting eventually backed the quarter point cut. Bailey said pressure on service price inflation will be weighed down by a ‘gradual normalisation’ in UK pay growth. However, food and energy prices have picked up recently. The two components are largely to blame for a recent pick-up in the UK CPI inflation rate. Food price inflation was stronger than predicted, Lombardelli said at the press conference that followed the vote. Food and non-alcoholic beverage prices rose 4.5% annually in June, picking up speed from 4.4% in May, 3.4% in April, and 3.0% in March. Lombardelli is BoE deputy governor for Monetary Policy. The food and non-alcoholic beverage price inflation rate spiked to the loftiest since February 2024 but is still off a recent peak of 19.2% in March 2023. Food and energy prices are ‘salient’ to consumer inflation expectations, both Bailey and Lombardelli noted, giving policymakers something to chew over. Nonetheless, Bailey believes the path for UK interest rates is still ‘downward’ and policy remains ‘restrictive’. ‘The path has become more uncertain, but I’ve not changed my view on the direction of the path,’ Bailey told reporters. The BoE said a ‘gradual and careful approach to the further withdrawal of monetary policy restraint remains appropriate’. ‘The timing and pace of future reductions in the restrictiveness of policy will depend on the extent to which underlying disinflationary pressures continue to ease. Monetary policy is not on a pre-set path, and the committee will remain responsive to the accumulation of evidence,’ the central bank said. Underlying UK economic growth has remained ‘subdued’, consistent with a continued, gradual loosening in the labour market and a ‘margin of slack is judged to have emerged in the economy’. In the monetary policy report of projections, the BoE forecast UK economic growth to hit 1.25% this year, slightly better than the central bank’s previous estimate of 1.00%. That level of growth is not ‘something you’d celebrate’, Lombardelli said. The upgrade to the forecast, Bailey added, reflects recent data and not a ‘change of view of the economy’. Since the May decision, numbers from the ONS have showed the UK economy grew 0.2% on-month in March, before a 0.3% fall in April and a 0.1% decline in May. Quarter-on-quarter, growth was 0.7% in the first quarter. The knife-edge decision, as well as the need for a second vote, grabbed most of the attention on Thursday. Bailey said a second round was the ‘appropriate’ course of action, despite the governor being entitled to the casting vote in the event of a tie, as the balance of distribution of votes was for a cut, not a hold. The BoE’s policy statement gave a clue into the thinking of policymakers. The four that initially voted for the quarter-point cut, so not including Taylor, had ‘greater signs of disinflation from labour market quantities and wages’ in mind. However, they were mindful that ‘higher food prices could raise inflation expectations and generate greater inflation persistence’. Taylor believed the ‘picture was one of downside risks in coming years’. ‘Namely: inflation below forecast, and activity weak or an increased risk of recession. For insurance against this balance of risks, a less restrictive policy was warranted,’ the BoE statement said. Those that pushed for the hold noted the ‘disinflationary process had slowed and the risk of inflation expectations feeding through to second-round effects had risen’. ‘These members would continue to assess the pace of disinflation, being alert to downside pressures on pricing power from domestic demand and global forces, alongside the risk of greater inflation persistence from structural changes in goods and labour markets. A slower loosening of policy would reduce the risk of inflation not meeting the target sustainably,’ the BoE said. Bailey also fielded questions on the UK bond market on Thursday. ‘Over the past year, 10-year gilt yields have risen by around 55 basis points and 30-year gilt yields have risen by around 95 basis points in the UK,’ the BoE said. However, policymakers believe this bond yield steepening is ‘not just a UK story’. The BoE’s monetary policy report said: ‘Similar, albeit somewhat smaller, moves have been seen across countries. For example, in the US 10-year yields rose a little over 20 basis points and 30-year yields rose 60 basis points. In Japan, 10-year and 30-year yields rose by around 50 basis points and 100 basis points respectively. And in the euro area, 10-year and 30-year yields have risen by around 25 basis points and 60 basis points respectively.’ The yield on the 10-year UK gilt was at just under 4.56% in the wake of the BoE press conference, stretching from 4.53% late Wednesday. The 30-year yield widened to 5.38% from just above 5.36%. The pound was buying $1.3419, up slightly from $1.3409 before the conference started, and up from $1.3377 prior to the rate decision at midday. Copyright 2025 Alliance News Ltd. All Rights Reserved.
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