Another UK interest rate cut this year looks increasingly unlikely

Traders see a growing likelihood the Bank of England will keep interest rates on hold for the rest of the year, after inflation came in at a higher-than-expected 3.8% for July.

Money markets were on Wednesday putting a 57% probability on the Bank Rate remaining at the current 4% at the BOE’s final meeting of 2025 in December, according to LSEG data.

Expectations earlier in the summer leaned toward at least one more quarter-point cut in 2025, particularly given the moderate pace of economic expansion, signs of easing wage growth and increased certainty on the trade front, after the U.K. secured an early tariff deal with the White House.

That changed at the BOE’s August monetary policy meeting. The vote to cut rates came via an unexpectedly slim 5-4 majority, with the dissenting policymakers preferring another hold.

Messaging that the BOE is “focused on squeezing out any existing or emerging persistent inflationary pressures” and that Governor Andrew Bailey sees an upside risk to the inflation outlook amid geopolitical uncertainty, reinforced the idea that the central bank is highly wary of cutting too soon.

The latest inflation print out Wednesday produced a mixed picture. The headline 3.8% rate was a touch above the 3.7% consensus flagged in a Reuters poll, though in-line with the BOE’s own forecast, which sees price rises peaking at 4% in September before easing to 3.6% by the year-end.

Areas of concern include rising food prices and persistently high inflation in the services sector — attributed by some economists to the government’s recent hikes to the minimum wage and tax contributions for employers. However, energy prices applied downward pressure in July.