BoE holds rates while ECB cuts, both highlight concerns over rising economic uncertainty
Summary
The Bank of England (BoE) kept rates on hold as expected today, with policy makers voting 8-1 to leave rates at 4.50%. After cutting rates in February, the Bank’s statement repeated that it would take a “gradual and careful approach” toward future rate cuts. However, there was a more cautious tone compared to last month’s meeting, with the BoE echoing recent warnings from other central banks over heightened global economic uncertainty.
The European Central Bank (ECB) lowered the three key interest rates by 25 basis points, as expected, reducing the deposit facility rate to 2.50%. They stated their assessment of monetary policy as becoming “meaningfully less restrictive,” suggesting a tilt from a dovish to a more neutral stance. President Christine Lagarde emphasized that the highly uncertain macro environment made setting policy more challenging, contrary to her past message that the path to lower rates is clear.
Bank of England
The BoE’s Monetary Policy Committee’s (MPC) vote was surprising, with only Swati Dhingra dissenting in favour of a 25-basis point-cut, while Catherine Mann — who voted to cut rates by 50 bps in February — took a more cautious view this time around.
Governor Andrew Bailey suggested that recent global developments meant that the Bank would need to pay closer attention to the impact on the domestic and global economies at their subsequent meetings. Inflation remains a concern and is still forecast to peak at almost 4% later this year, limiting the Bank’s scope to bring down borrowing costs in the near term. Wage growth continues to run at levels far above what would be consistent with the 2% inflation target, though they have eased marginally. The BoE also noted government tax hikes and fiscal policy as potential upside risks to inflation, with business surveys reporting employer’s plans to raise prices due to the payroll tax increases.
The MPC still expects inflation pressures to continue easing but stated that "there was no presumption that monetary policy was on a pre-set path over the next few meetings." The market seems to believe that the BoE has shifted to a slightly less dovish stance, with traders not fully pricing in the next rate cut until August. Sterling interest rate swaps edged higher following the meeting, while the currency strengthened against both the euro and the U.S. dollar.
Source: Chatham Financial
European Central Bank
The ECB’s rate cut came amid a flurry of recent announcements from the Trump administration that have caused both concern and anger among European leaders. Threats of significant tariffs on European imports to the U.S. and a reduction in U.S. military support for Europe have prompted counter tariff threats and increased European defence spending. Germany alone plans to borrow and spend billions on its military. Both actions would have implications for growth and inflation, likely causing the ECB’s more cautious guidance on further monetary policy easing.
The Central Bank has cut rates six times since last summer in response to sluggish economic growth across the bloc and easing inflationary pressures. However, recent CPI readings have pointed to some upside risks that could become more pronounced if tariffs and major government defence spending proceed. The market has certainly viewed the ECB’s stance as more hawkish, with eurozone swap rates rising over 10 basis points and the euro having strengthened approximately 5% this month.
Source: Chatham Financial
Moving forward
Both the BoE and the ECB have signaled a more cautious approach to monetary policy in the face of heightened global economic uncertainty. For the BoE, lingering inflationary pressures, particularly from wage growth and employer tax hikes, continue to constrain the pace of rate cuts. Economic growth has been weak, but with the prospect of increased government spending both at home and abroad, policymakers will likely wait for further clarity on the inflationary picture before putting monetary policy in a less restrictive setting. For the ECB, while further rate cuts are expected, the timing and magnitude will partly depend on how external risks develop, reinforcing the theme of gradual and careful policy adjustments.
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