Bank of England keeps interest rate at 3.75% As expected
the pound sterling and two-year government bond yields fell on Thursday after the Bank of England kept interest rates unchanged in a surprisingly close vote and said it expected to cut them in the future if inflation continued to slow.
Sterling continued to lose ground against the dollar after the decision, falling 0.8% to a two-week low of $1.3540.
Yields on two-year UK government bonds, which reflect short-term interest rate expectations, fell to their lowest level in three weeks after the decision, down 9 basis points during the day.
Yields on 10-year UK government bonds also fell slightly, down 1.5 basis points.
The UK FTSE index pared some of its earlier losses after the decision, but was still down 0.8% on the day.
Summary of the Bank of England's Monetary Policy Report
- The Bank of England's Monetary Policy Committee voted 5-4 in favor of keeping the base rate at 3.75%, while four members voted in favor of cutting the rate by 0.25 percentage points to 3.5%.
- Breeden, Dingra, Ramsden, and Taylor voted to cut interest rates by 25 basis points.
- The central interest rate forecast is conditional on a slight decline in the market curve in 2026.
- The Monetary Policy Committee (MPC) favored further bank rate cuts, with differing views on the timing and extent.
- Slowing the pace of further monetary easing could provide space to gain confidence about how risks are evolving.
- Judgments about further monetary easing will become more difficult.
- The Monetary Policy Committee concluded that the risk of persistently high inflation has begun to recede.
- Most members of the Monetary Policy Committee saw some residual downside risks related to weaker economic prospects.
- Inflation risks remain due to weak demand and a softening labor market.
- Monetary Policy Committee members had differing views on the sustainability of the decline in inflation in the near term.
- Inflation, as measured by the consumer price index, is expected to decline to around 2% from April, largely due to energy prices.
