Chris Arcari, Head of Capital Markets, Hymans Robertson, says: “Inflation eased in May, but much of this reflects an adjustment to prior figures and underlying inflation pressures remain high. Both headline and core CPI, which excludes volatile energy and food prices, are running above target at 3.4% and 4.2%, respectively. And, with energy prices expected to drive inflation higher in 2025, the Bank of England were expected to hold rates at today’s meeting. Nonetheless, the Bank of England believes interest rates, at 4.25% p.a., to be slightly restrictive and the market is still pricing in almost two 0.25% p.a. rate cuts before the end of the year. With lingering inflation pressures and rises in oil prices on the back of open conflict between Israel and Iran posing upside risks, and global growth expected to slow, as tariffs act as a tax on global consumption, we see the risks to market pricing as broadly balanced.”
Julius Bendikas, Mercer’s European Head of Economics and Dynamic Asset Allocation said: "The Bank’s Monetary Policy Committee held interest rates today at 4.25% as expected. This decision comes in the face of the latest inflation figures of 3.4%, which is above the Bank of England’s target, with services inflation remaining especially elevated. Increasing tensions in the Middle East, which could have an impact on the global growth and inflation outlook, will also have been taken into consideration. We think UK inflation is likely to fall back to target in 2026 as wage growth falls. This should enable the Bank to cut rates not only later this year, but also next year.”
Simeon Willis, Chief Investment Officer at XPS Group: Following the release of the inflation figures yesterday, the market was pricing in a likelihood of staying at 4.25% at around 9 in 10 so this decision comes as no surprise. It’s difficult for interest rates to fall when inflation is so much above the 2% target. In addition, we will need to wait 3 months before we have some higher inflation months from 2024 dropping out of the 12 month calculation. Geopolitical risks are also in play, with concerns that conflict in the Middle East could push oil prices higher. That said, despite recent increases, oil is still comfortably within its trading range of the past few years. The Bank is walking a tightrope. April’s GDP data showed a 0.3% monthly contraction, so there’s a clear need to support growth, even if that remains secondary to the core goal of controlling inflation. For pension schemes, the backdrop remains relatively favourable: longer-term yields are still elevated, while inflation expectations have eased, offering something of a best-of-both-worlds scenario.
Dean Butler, Managing Director for Retail Direct at Standard Life, part of Phoenix Group, said: “Ongoing economic uncertainty at home and abroad has played its part in the Monetary Policy Committee’s decision today to hold interest rates. With inflation remaining stubbornly above 3%, continued instability driven by geopolitical tensions and the ripple effects of recent global trade actions, has influenced the Bank of England in adopting this cautious approach. While some forecasters still anticipate rate cuts later in the year, today’s decision underlines the fact that the path to a lower-rate environment will not be straightforward. For borrowers on variable rate mortgages or nearing the end of fixed terms, any delay in rate cuts will continue to put pressure on monthly budgets - especially with the ongoing cost of living challenges and recent household bill increases in April. For savers, the current pause could provide a short window of stability and keep best buy retail cash rates higher for longer. However, with inflation above target, real returns on cash savings risk being eroded and it remains important to consider a diversified approach. Keeping some accessible cash for emergencies is wise, but for longer-term goals, investing can offer the dual advantages of potential inflation-beating growth and, for products like ISA’s and pensions, tax efficiency. While investing carries risk, a long-term perspective can help build greater financial resilience over time.”
Marcus Jennings, Fixed Income Strategist, Global Unconstrained Fixed Income, Schroders: “Market expectations were low for this Bank of England meeting and in the event, it proved to be one of the less volatile moments for the gilt market. The Bank has recently reiterated a gradual approach to rate cuts and the macro developments since the last meeting have broadly played into this view. Unsurprisingly then, the tone of today’s meeting was largely unchanged compared to previous guidance, even if the vote split skewed slightly dovish relative to consensus. With a nod to more slack in the labour market, it should give the Bank more confidence to continue easing at a gradual pace later this year."
Chris Helyar, Partner in LCP’s investment team, commented: “The decision to hold rates at 4.25% reflects the MPC’s cautious stance amidst lingering inflationary pressures and persistent political uncertainty. CPI eased to 3.4% in May but remains well above the 2% target. Rising household costs have contributed to elevated inflation in recent months, while increased tensions in the Middle East have driven up global oil prices, adding further inflationary pressure. Disappointing economic growth figures, rising unemployment along with slowing wage growth had provided the MPC with arguments for a further cut, but weren’t enough to tip the balance that way. Today’s decision underscores a wait-and-see narrative in what is a very uncertain economic and geopolitical environment.”
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