The Bank of England has left interest rates unchanged at 3.75%, a move that was widely expected but which leaves asset and fund managers continuing to navigate a delicate balance between easing inflation and a slowing economy.
With CPI holding at 2.8% and signs of softer growth and labour market conditions emerging, attention is increasingly shifting from whether rates have peaked to when the next cut might arrive. For fund managers, the decision reinforces the importance of maintaining a flexible approach as markets continue to weigh inflation risks, economic uncertainty and the implications for asset allocation in the months ahead.
Asset managers respond to the Bank’s recent announcement:
Michael Browne, Global Investment Strategist, Franklin Templeton Institute, said:
“In the current environment, where positive and negative data points are broadly balanced, it is understandable that the MPC has chosen to sit on their hands and hold rates steady. Inflation is likely to rise into July following the next domestic energy price cap reset, as the effects of the Iran will not yet be evident by then.
“The real test comes in September: will there be evidence of second-round effects? Will the autumn wage round – across public and private sector – prove sufficiently restrained to keep longer-term inflationary risk in check? By autumn, the data should provide clearer answers, and the MPC’s decision to hold may well be vindicated. Until then, both the MPC and the markets will be left to wait and watch.”
Esther Watt, Bond Strategist at Evelyn Partners, said:
“As widely anticipated, the Bank of England’s (BoE) Monetary Policy Committee (MPC) kept its Bank Rate steady at 3.75% with the vote split 7-2. Chief Economist Huw Pill and external member Megan Greene were in the hawkish camp voting for a 25-basis point (bp) hike. In the six weeks since the last MPC meeting, data came in mixed as the economy showed tentative signs of improving growth with first quarter GDP print coming in at 1.1% (0.8% surveyed and 1.0% prior), albeit mostly covering the period before the Iran War started.
“Meanwhile, the oil price spiked towards $120 and second round effects began to work their way through the system. Arguably the already weak labour market (unemployment at 4.9% and private earnings growth slowing to 2.9% in April) and better-than-expected price data (CPI holding at 2.8% versus 3.0% surveyed for May) already mitigate this somewhat with tight monetary conditions buying the committee time to assess the situation before responding.
“Following this week’s peace deal in which both the US and Iran have announced victory, oil is now trading back down with Brent futures ~$78.5. This puts the outlook for the economy ahead of the Bank’s most constructive Scenario A (defined in April’s Monetary Policy Report) which saw Bank Rate ~4.0-4.5% by the end of the year.
“The Bank held it’s guidance that the Committee will continue to closely monitor the situation in the Middle East and how its impact propagates through the economy. With gilt markets having recovered to price one 25 basis point hike taking the Base Rate to 4.0% in September, this is a significant improvement relative to the three 25bp hikes priced before year end for the last meeting.”
Daniele Antonucci, Chief Investment Officer at Quintet Private Bank (parent of Brown Shipley), said:
“The Bank of England’s decision to hold rates, while as expected, reflects a deliberate strategy to maintain restrictive conditions while preserving flexibility in the face of still-uncertain inflation dynamics. An ‘active hold’ stance signals that policy is already sufficiently tight, but the hurdle for further hikes isn’t as high as previously.
“Given the decline in oil prices, some slowing in wage growth and a modest undershoot in UK inflation relative to expectations, the Bank is prioritising evidence over pre-emption, underscoring its view that policy calibration must remain data-dependent in a volatile global environment. Energy-driven inflation pressures continue to work their way through the system, reinforcing the case for patience even as headline projections show a more moderate trajectory than previously feared.
“While the decision came just a few days after US-Iran interim deal extending the ceasefire and hopefully reopening the Strait of Hormuz, the split vote within the Monetary Policy Committee highlights growing sensitivity to inflation expectations, but not yet enough conviction to justify immediate tightening.
“What to make of this is clear: if there is a single theme we hear when we speak with investors, it is that outcomes are becoming more varied and less predictable. Inflation shocks, political developments and technological shifts can all influence markets, sometimes simultaneously.
“In this context, diversification is a way of exposing portfolios to a range of potential drivers of return, while also including assets that may behave differently when conditions change. Within equities, this is reflected in how we position across regions and sectors. In the US, we continue to hold our equal-weighted index to diversify from the concentrated AI trade. European equities have lagged a bit this year, given their higher sensitivity to energy prices. However, we don’t want to reduce our current neutral allocation yet, as a more durable end to the conflict, if the peace deal holds, might trigger a tactical rebound.
“We’re also keeping our overweight in UK equities as it has a very different sector composition compared to the US, which offers good diversification in portfolios and exposure to different and more defensive themes. Alongside equities and government bonds, commodities, gold and selected alternative investments play a complementary role in diversifying portfolios. This broad mix helps limit the impact of any single shock, whether driven by oil, geopolitics or shifts in market leadership.”
Janet Mui, head of market analysis at wealth manager RBC Brewin Dolphin, said:
“The Bank of England’s decision to keep rates on hold reflects a view that while inflation remains above target, the risk of a renewed inflation shock has diminished. Governor Andrew Bailey has repeatedly stressed that the key concern is whether higher energy prices trigger second-round effects through wages and broader pricing behaviour.
“Most recently, oil prices have fallen and the Hormuz is expected to reopen following a US/Iran agreement. At the same time, a softer labour market and slower private-sector wage growth should make it harder for higher energy costs to become embedded in the economy. The MPC remains data dependent, but today’s decision suggests policymakers see the current level of rates as sufficiently restrictive while they assess how inflation and labour market dynamics evolve.”
Derrick Dunne, CEO of YOU Asset Management, said:
“This decision broadly makes sense. There’s still a lot that isn’t clear in the economic outlook but if inflation continues to surprise to the lower end then it is going to become more difficult for the Bank of England to justify persistent holds – especially given the weakness in the labour market.
“However, despite the inflation undershoot, the number of dissenters to the hold (or a cut) has doubled from one to two. The hawks on the committee, Pill and Greene both argue there is a threat from second order inflation which is yet to emerge in the data. Both favoured a hike to 4%. Catherine Mann voted to hold with the crowd but appears to not be against a hike.
“This is somewhat surprising given the current inflation picture and we now have a real disagreement emerging as most of the rest of the committee is still intent on tolerating higher-than-target inflation for now. The question becomes whether we’re yet to see an inflation spike or not, given the Middle East crisis is now easing.
“The reality here is that we’re looking a longer way off than many would have hoped for a renewed round of rate cuts. The MPC is clearly still highly tentative about the path inflation is following – even if the data seems to suggest it is softening. Anyone unsure what this could mean for their long-term financial plans should consider consulting with a financial planner.”
Aaron Bright, Investments Analyst at IG, said:
“No surprises from the Old Lady today, with the Bank keeping rates parked at 3.75%. The interesting story is the voting split. The Committee voted 7-2 to hold, with two members pushing for a hike.
“The Bank finds itself in an awkward spot. Inflation has cooled to 2.8%, but it remains stubbornly above the 2% target, and the energy shock from the Iran conflict has not fully unwound, with the Bank wary it could yet feed through later in the year. Recent labour market figures also came in firmer than expected, which hands the hawks a touch more ammunition.
“A real talking point for the months ahead is the US-Iran deal, agreed this week and due to be signed. A full reopening of the Strait of Hormuz would let energy prices unwind and ease some of the pressure keeping the Bank on hold, opening the door to potential loosening in the near future. The agreement is a step forward, though it is not without risk. The earlier April truce was extremely fragile and not water tight, so policymakers will likely want to see the deal hold before banking on a durable peace.”
