The Bank of England has held interest rates at 4.5%, despite fresh data from the Office for National Statistics showing the UK economy unexpectedly suffered a no-growth January.
At a meeting of the MPC on Wednesday, attendees voted by a majority of eight-to-one in favor of a rate hold, the Bank said in a statement on Thursday.
These voting numbers imply there was near-complete consensus on the committee, and this will be front of mind for traders and investors trying to predict the trajectory of Bank decisions during the rest of the year.
Interest rate swaps data had previously shown a 95% chance of a hold in this March decision.
The news comes as the rate of UK inflation remains one percentage point higher than the Bank’s target 2% target: the Consumer Prices Index rose by 3% in February.
“Since the MPC’s previous meeting, global trade policy uncertainty has intensified, and the US has made a range of tariff announcements, to which some governments have responded,” the Bank said.
“Other geopolitical uncertainties have also increased and indicators of financial market volatility have risen globally. The German government has announced plans for significant reform to its fiscal rules.
“While UK GDP growth estimates have been slightly stronger than expected at the time of the February Monetary Policy Report, business survey indicators generally continue to suggest weakness in growth and particularly in employment intentions. In recent quarters, subdued activity has been judged to reflect both demand and supply factors.”
Bank of England’s Slow and Steady Approach
Despite this pause in the Bank’s rate cutting trajectory, Michael Field, chief equity strategist at Morningstar, says the “slow and steady” approach makes sense.
“Markets may be pricing in further interest rate cuts in 2025, but it seems this week’s meeting comes too soon for one of these cuts,” he says.
“In the wake of Trump tariff threats, and inflation spiking once again in the UK, to 3%, the slow and steady approach to rate cutting makes sense. Rates are down 75 basis points from their peak, and the Bank of England has been very clear in communicating that it wishes to bring down rates further, something that is currently being appreciated by equity investors, with the FTSE close to all-time highs.”
Interest Rates Held — Market Reaction
This afternoon the FTSE 100 fell marginally on the news of the rate hold. Again, however, Field remains optimistic.
“We still see plentiful equity market opportunities for investors in the UK and believe further interest rate cuts over the course of 2025 will lighten the load for consumers and businesses alike,” he says.
“This should create a more supportive economic backdrop for commerce generally.”
Bond investors will now watch the government’s Spring Statement next week keenly for indications the chancellor is sticking within her new fiscal rules.
UK government bond yields spiked at the start of the year amid concerns over the sustainability of UK spending and taxation plans, as well as being caught up in a wider repricing of government debt across the world.
“With CPI inflation uncomfortably above the Bank’s target, the Bank seems to be taking a cautious approach to policy setting, even though it views many of the drivers of short-term inflation as temporary in nature,” says Ranjiv Mann, senior fixed income portfolio manager at AllianzGI.
“In the near term, focus will also turn to the government’s Spring statement on March 26. The government looks to have run out of fiscal space against its fiscal rules.
“Pressure is growing on the government to take corrective action to cut spending further and possibly also announce new tax raising measures to fill the hole in the public finances. A government that remains firmly committed to its fiscal rules could bring the BoE back into play.”
UK Economic Forecasts Revised Downwards
Falling UK gross domestic product is one of the key reasons why the Bank of England should continue to cut interest rates in 2025, some economists argue.
Keeping higher interest rates typically cools activity in the real economy, meaning more money is spent servicing credit card and corporate debt, and less is spent by consumer shoppers at the tills. Simultaneously, businesses may restrict capital investment, research and development, and manufacturing to maintain profitability.
This is already the feared consequence of several UK tax rises announced in October’s government Budget. Top of mind for many businesses is an increase to employers' national insurance contributions in the upcoming tax year.
The last time the Bank of England cut rates in February this year, it also issued the latest iteration of its quarterly Monetary Policy Report, which revised several key predictions about inflation and economic growth.
In it, it revised upwards inflation predictions for the first quarter of this year—to 2.8%, from last year’s prediction of 2.4%. UK inflation is still running at 3%. It expects to hit the 2% CPI target in 2027.
At the time, governor Andrew Bailey also observed that economic activity is weakening. In the report, his colleagues had halved UK economic growth expectations to 0.75% from 1.5%.
The Bank is not the only paring back its hopes. Earlier this week, the Organization for Economic Co-operation & Development, or OECD, also cut its predictions for UK growth, though its picture is more optimistic: 1.4% growth in 2025, down from a previous prediction of 1.7%.
“Further fragmentation of the global economy is a key concern. Higher and broader increases in trade barriers would hit growth around the world and add to inflation,” the OECD said.
“Higher-than-expected inflation would prompt more restrictive monetary policy and could give rise to disruptive repricing in financial markets.”
Will the Bank of England Continue to Cut Rates in 2025?
Expectations about the Bank of England’s decision-making trajectory have changed considerably in the first quarter of 2025.
At the start of the year, traders and investors were confident of just one interest rate cut, which occurred as predicted in February. Interest rate swaps data shows a 77.0% chance of another rate cut at the Bank’s May meeting, and a further 55.6% chance of a further cut in August. If each of those cuts is 0.25%, this would leave UK interest rates at 4.0%, which would still be relatively high.
There is still significant uncertainty surrounding this, however. At the moment, the geopolitical picture changes daily, and investors in equities and bonds alike are anxious to know about the knock-on effects of the Trump administration’s tariffs, alongside any deals done with Russia and Ukraine over the latter’s future.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar's editorial policies.
