By Suban Abdulla and David Milliken
LONDON (Reuters) -The Bank of England held interest rates at 4.25% as expected on Thursday but said it was focused on risks from a weaker labour market and higher energy prices as conflict in the Middle East escalates.
The Monetary Policy Committee voted 6-3 to keep rates on hold. Deputy Governor Dave Ramsden joined Swati Dhingra and Alan Taylor to vote for a quarter-point reduction.
The three policymakers highlighted “a material loosening in labour market conditions” after official figures showed the highest unemployment rate since 2021 and weaker wage growth.
A Reuters poll of economists had forecast an 7-2 vote to keep rates on hold after the central bank cut borrowing costs last month for the fourth time since August 2024.
“Interest rates remain on a gradual downward path,” Governor Andrew Bailey said, although policymakers added that interest rates were not on a pre-set path.
“The world is highly unpredictable. In the UK we are seeing signs of softening in the labour market. We will be looking carefully at the extent to which those signs feed through to consumer price inflation,” Bailey added.
The central bank said rising tensions in the Middle East as it held its meeting over the past week had not been key to June’s decision to hold rates, but would be closely monitored.
“Energy prices had risen owing to an escalation of the conflict in the Middle East. The committee would remain vigilant about these developments and their potential impact on the UK economy,” the BoE said.
Nearly all 60 economists polled by Reuters before the BoE’s June meeting had predicted it would keep Bank Rate on hold at 4.25%, with the next cut likely in August with a further reduction in the final three months of this year.
Sterling briefly fell by around a fifth of a cent against the U.S. dollar after Thursday’s decision, while investors continued to price in almost two more quarter-point rate cuts this year.
“We still expect two more rate cuts this year, but there is clearly a significant risk that the MPC chooses to ‘skip’ one of those cuts if energy prices keep rising,” Thomas Pugh, chief economist at accountants RSM UK, said.
The central bank kept its guidance, saying it would take a “gradual and careful” approach to further rate cuts.
But Bank staff analysis struck a less pessimistic tone about the potential impacts of U.S. President Donald Trump’s tariffs on the global economy, saying it might be less severe than thought in May. Trade uncertainty would still continue to have an impact on the UK economy, the central bank added.
INFLATION RISING
The BoE left its forecast for inflation broadly unchanged for the second half of this year, seeing a peak rate of 3.7% in September, up from 3.4% in May, and an average of just under 3.5% for the rest of the year.
The economy is now expected to grow around 0.25% in the second quarter of this year, slightly stronger than in its May forecast, though it said the underlying pace was weak.
The central bank said it expected a significant slowing in pay growth over the remainder of the year.
Since the middle of last year, the BoE has cut interest rates by 1 percentage point, the same as the U.S. Federal Reserve – which on Wednesday held interest rates at the 4.25%-4.50% range – but only half as much as the European Central Bank, which has had less persistent inflation.
Markets see just under half a percentage point more easing by the Fed this year and a further quarter-point cut by the ECB.
The Fed on Wednesday cut its economic growth forecasts for 2025, raised its inflation projection and said the uncertainty hanging over the economy had diminished but remained elevated.
Earlier on Thursday, the Swiss National Bank cut rates by 25 basis points to zero as inflationary pressures decreased and it focused the risk of trade wars for inflation and the global economy.
(Writing by Suban Abdulla; graphics by Sumanta Sen; Editing by Alex Richardson)