Central Bank decreases rate in May

Latest bank decision: On 8 May, the Central Bank voted by a majority to reduce the Bank Rate by 0.25% points to 4.25%.

Monetary policy drivers: One key factor influencing the decision was recent disinflation progress, with CPI inflation falling to 2.6% in March from 2.8% in February, moving closer to the Central Bank’s 2.0% target. Moreover, the Bank expects a “significant” slowdown in pay growth later this year, which should cap price pressures ahead. Finally, the Bank commented that since the middle of 2024 the labor market had loosened and underlying GDP growth had slowed, further justifying a rate cut.

More cuts to come: The Central Bank suggested that future rate cuts would be “gradual and careful”. Our Consensus is currently for around 50 basis points of extra cuts between now and end-2025, with forecasts ranging from zero to 150 basis points.

Panelist insight: On the outlook, Nomura analysts said: “We continue to expect the Bank to cut rates three times more, at a quarterly pace, until reaching 3.50% (upper end of what we think is the neutral range) by early 2026. Dissents for unchanged policy and reduced uncertainty should the mooted UK-US trade deal go through probably lower the risk of a back-to-back rate cut at next month’s meeting.” ING’s James Smith said: “We still think the path of least resistance is for the Bank to keep cutting rates once per quarter this year, which would see its next move in August. That said, we wouldn’t fully rule out the BoE moving faster at some point. The major uncertainty surrounding April’s services inflation figure […] was, we suspect, a key factor keeping the Bank more cautious.”

How should you choose a forecaster if some are too optimistic while others are too pessimistic? FocusEconomics collects British interest rate projections for the next ten years from a panel of 41 analysts at the leading national, regional and global forecast institutions. These projections are then validated by our in-house team of economists and data analysts and averaged to provide one Consensus Forecast you can rely on for each indicator. By averaging all forecasts, upside and downside forecasting errors tend to cancel each other out, leading to the most reliable interest rate forecast available for British interest rate.

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