The Bank of England (BOE) cut its key interest rate by 25 basis points to 4.25%, but surprised markets with a deeply divided 5-4 vote that sent the pound climbing higher across the board.
In a significant shift, two members of the Monetary Policy Committee voted for a larger half-point reduction, while two others preferred to keep rates steady at 4.5%. This three-way split revealed much stronger disagreement within the committee than analysts had expected.
Key Takeaways:
- BOE lowered its Bank Rate by 25 basis points to 4.25% from 4.5% as widely expected
- Monetary Policy Committee (MPC) delivered an unexpected 5-4 vote split
- 5 for 25bps cut, 2 for 50bp cut, 2 for no change
- Dhingra and Taylor preferred a larger 50bp cut
- Mann and Pill wanted to keep rates unchanged at 4.5%
- BOE maintained its “gradual and careful” approach to future rate cuts
- MPC’s updated economic projections
- GDP forecast raised to 1% for 2025 (from 0.75%), but lowered to 1.25% for 2026 (from 1.5%)
- Inflation projected to peak at 3.5% in 2025 Q3 before returning to target
- Unemployment rate expected to rise to 5% by end of 2026
- MPC’s tariff-related adjustments
- Expects tariffs to reduce U.K. GDP by 0.3% over three years
- Expects tariffs to lower U.K. inflation by 0.2 percentage points in two years
Link to Bank of England Monetary Policy Statement (May 2025)
A separate report showed the BOE now sees the economy facing a difficult balancing act – while headline GDP growth looked strong in Q1 at 0.6%, the bank noted this was driven by “erratic factors” and estimated that underlying growth was actually around zero.
The committee also highlighted that trade-related developments in financial markets had generally pushed down on growth, including through the appreciation of Sterling.
Link to BOE’s Monetary Policy Report (May 2025)
In this presser, Governor Bailey emphasized the need for caution amid unpredictable global conditions. “The past few weeks have shown how unpredictable the global economy can be. That’s why we need to stick to a gradual and careful approach,” he stated. Bailey welcomed reports of a potential U.S. – U.K. trade deal but noted that Britain would still be held back by weaker global demand if tariffs on other countries remained in place.
Bailey also highlighted that monetary policy was “not on a preset path” and that the committee would “remain sensitive to heightened unpredictability in the economic environment.” When questioned about future rate cuts, he emphasized that decisions would be made meeting by meeting, reinforcing market perceptions of a more cautious approach than some had anticipated.
Link to BOE Gov. Bailey’s press conference (May 2025)
Market Reaction
British Pound vs. Major Currencies: 5-min
Overlay of GBP vs. Major Currencies Chart by TradingView
Traders quickly scaled back bets on a follow-up cut in June, with markets now pricing less than a 20% chance versus about 50% before the decision.
The British pound, which had been trading cautiously ahead of the release, swung higher following the BOE’s decision. Sterling maintained its upward momentum through Governor Bailey’s press conference and until the U.S. session open when other catalysts pushed the major currencies around.
The pound’s rise reflects this repricing of rate expectations, with the market interpreting today’s decision as a “hawkish cut” that signals fewer rate reductions ahead than previously expected.
The announcement of the U.S.-U.K. trade deal helped improve risk sentiment during the U.S. session, dragging GBP lower against the U.S. dollar and “risk” currencies like the Australian and New Zealand dollars. Still, the pound capped the day higher against the majors except against USD.