Projected UK Interest Rates in 5 Years: Bank of England Keeps Rates Unchanged
- The Bank of England decided to leave interest rates unchanged.
- The bank was divided, as three members voted to cut rates but six had different views.
- Rates play a fundamental role in tackling high inflation.
At its June meeting, the Bank of England held interest rates steady, as widely expected, but the vote wasn’t unanimous.
Three members of the Monetary Policy Committee pushed for a 0.25% cut, while the majority, six members, voted to keep rates unchanged.
The committee signaled that while rate cuts are likely on the horizon, they’ll come slowly.
Officials stressed a “gradual and careful” approach to easing, with no rush to loosen monetary policy too quickly.
Bank of England Holds Rates Amid Mixed Signals
The Monetary Policy Committee (MPC) voted 6–3 to hold the Bank Rate at 4.25% in June , with three members preferring a 0.25% cut.
The decision reflects caution as inflation eases, but global and domestic uncertainties persist.
Inflation has fallen significantly in recent years as earlier shocks faded and tight monetary policy took effect.
Consumer price index rose to 3.4% in May, driven by regulated prices and past energy increases, but is expected to trend lower toward the 2% target in 2026.
The Gross Domestic Product remains weak, and the labour market continues to loosen, with signs of slack and slowing wage growth.
However, the MPC remains watchful of inflation risks from pay and external shocks, including rising energy prices linked to Middle East tensions.
Globally, growth is mixed. Euro-area and China GDP grew strongly in the first quarter, while the U.S. GDP contracted slightly.
Trade tensions, especially around U.S.-China tariffs, continue to add uncertainty. Inflation is easing in the euro area and the U.S., but U.K. services inflation and wage growth remain more elevated.
The MPC stressed that monetary policy will remain restrictive as long as needed and reiterated that there is no pre-set path. A gradual, data-dependent approach to future rate changes remains appropriate.
BoE Stuck in “Higher for Longer” Interest Rate Phase
Lindsay James, an investment strategist at Quilter, told CCN, “The events of recent weeks mean all hopes of the Bank of England moving faster to cut interest rates have been extinguished.”
“Although we had three votes for a cut, ultimately inflation continues to drive decision making, and with the headline figure remaining elevated earlier this week, there is very little movement just now for the committee, and that is before global events are factored in,” the analyst added.
“We are still awaiting the full impact of Donald Trump’s tariffs to show up in the prices of goods. We are approaching the end of the 90-day pause on reciprocal tariffs, and what happens from there is really anyone’s guess.”
For the expert, even with the U.S.-U.K. trade deal, the raft of tariffs on other Nations would likely be felt in some form here too.
In particular, Europe looks the least likely to cave to Donald Trump, and given it is the U.K.’s biggest trading partner, there will be knock-on effects.
“It is such a difficult picture to navigate for the Bank of England, and as such it will act more cautiously, despite a desire from the market for rate cuts,” James said.
“Despite strong growth in the first quarter of the year, the expectation is the U.K. economy will stagnate again in the second half, making the need for rate cuts more prominent. But with risks on the global stage not only uncertain but also substantial, the mantra of rates being ‘higher for longer’ will continue.”
Goldman’s Expectations for the U.K. Economy
One of the primary reasons for Goldman Sachs’ revised outlook is the expectation of a cooling in U.K. wage growth in the coming months. This suggests that inflationary pressures may ease sooner than anticipated. It would allow the Bank of England to adopt a more accommodative monetary policy.
Goldman Sachs has revised its outlook for U.K. services inflation, anticipating a significant deceleration in the coming months. This key factor could enable the Bank of England to achieve its target of 2.0% inflation.
The investment bank expects services inflation to fall 5.0% by December, 0.3% below the BoE’s August forecast. Goldman Sachs further predicts that services inflation will continue to decline, reaching 3.8% by the end of 2025.
Stehn noted that progress in reducing underlying services inflation, excluding rent and education, will likely reassure the MPC that price pressures are easing.
Additionally, Goldman Sachs’ calculations suggest that the U.K.’s terminal interest rate, the level at which interest rates are deemed appropriate, is lower than in other comparable economies. This indicates that the BoE has more work to do regarding interest rate cuts.
The investment bank has assigned a 40% probability to its updated baseline expectation, a 30% probability to quarterly rate cuts, and a 20% probability to a more aggressive cutting cycle with 50 basis point increments.
A Historical Glimpse At U.K. Interest Rates
A review of the Bank of England’s interest rate history reveals a significant shift in approach beginning in February 2008. The global financial crisis prompted this shift, which originated in the U.S. with the housing market bubble in 2007 but subsequently impacted the U.K. economy.
Throughout 2008, the BoE implemented five rate cuts, reducing the rate from 5.25% in February to 2% in December.
This 2% rate marked the lowest level since the banking crises of the 1880s and 1890s, as reported by the International Monetary Fund (IMF).
It was also the lowest level since the Great Depression and World War II in the BoE’s interest rate history.
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U.K. interest rates increased notably after the pandemic ended. Source: BOE data.
In 2020, the BoE made two rapid interest rate cuts on March 11 and 19. These moves drove the U.K. interest rates to an unprecedented low of 0.1%. This sharp reduction mirrored the emergency measures other central banks and governments worldwide adopted to bolster their economies during the COVID-19 pandemic.
The Post-Pandemic Interest Rate Adjustment
The near-zero interest rate remained in effect until December 2021 , as the U.K. and other nations gradually reopened their economies. As the recovery gathered steam and inflation surged in tandem, the BoE increased the bank rate from 0.1% to 0.25% on Dec. 16, 2021.
This marked the U.K. as the world’s first leading economy to raise interest rates following the pandemic.
With the economy rebounding and commodity and energy prices soaring due to Russia’s invasion of Ukraine in February 2022, the BoE implemented eight rate hikes throughout 2022. By year-end, the bank rate had reached 3.5%.
In 2023, the U.K. Central Bank continued its tightening policy. It raised rates by 50 basis points (bps) to 4% in February. A 0.25% increase to 4.25% followed in March. And an additional 25 bps hike occurred in May, pushing the rate to 4.5%.
Assessing the Peak of U.K. Inflation in 2022
Inflation is pivotal in shaping the U.K.’s key interest rate in the short to medium term.
In 2022, U.K. inflation accelerated, with the consumer price index (CPI) reaching 11.1% in October. Although it temporarily receded towards the end of the year, a surprise uptick to 10.4% in February occurred. Rising food and non-alcoholic drink costs have driven the increase. Subsequently, inflation eased to 10.1% in March.
Inflation, economic growth, and labor market conditions will shape the Bank of England’s interest rate decisions in the coming years.
U.K. Interest Rate Projections For the Next 5 Years
Given the substantial increase in the Bank Rate at the onset of this tightening cycle, the current monetary policy stance is restrictive. The outlook for GDP anticipates a period of relatively stagnant growth during the first half of the forecast period. Furthermore, growth will remain well below historical averages in the medium term. This is partly due to diminishing fiscal stimulus and subdued potential supply growth.
The BOE said, “Compared to our assessment in August, the GDP forecast has been revised downward to account for recent data indicating weaker-than-expected economic activity.”
Tcommitteetee also decided to reduce the magnitude of the previous demand-boosting judgment in this forecast. However, the BoE said it was not entirely out of discussion.
In recent quarters, excess demand in the U.K. economy has decreased. Now, analysts expect a gradual increase in economic slack from the beginning of the next year. Unemployment will rise throughout the forecast period. It may exceed the committee’s revised medium-term equilibrium estimate by the end of the year.
The Bank said, “Additionally, uncertainties have arisen concerning the ONS’s official labor market activity data, primarily based on the Labour Force Survey. Therefore, the committee continues to weigh insights from a variety of indicators.”
Following the latest U.K. main economic indicators, the BoE expects an interest rate of 5.3% by the end of 2023. It also expects a rate of 5.1% for 2024, 4.5% for 2025, and 4.2% for 2026.
Impact Of Interest Rates On Cryptocurrency
Cryptocurrencies, including Bitcoin (BTC), have exhibited remarkable resilience despite rising interest rates. Notably, Bitcoin saw impressive growth, surging by 2,000% during the years 2015 and 2016, when interest rates notably increased.
However, elevated interest rates can have various effects on the cryptocurrency market. Persistently high inflation, rising gas prices, and increased energy costs due to higher interest rates may dampen risk appetite. According to some experts, they also pose challenges for cryptocurrencies.
Central Banks Influence On Cryptocurrencies
Central Banks play a pivotal role in shaping economic conditions by directly impacting money circulation and financial market stability.
Their ability to adjust interest rates directly affects borrowing rates for financial and banking institutions. Major central banks like the Fed, ECB, and BoE have opted for interest rate hikes in response to widespread inflation.
It is worth noting the increasingly intertwined relationship between cryptocurrencies and these macroeconomic and monetary shifts. The decisions to increase interest rates, particularly by the Fed, have immediate consequences for the cryptocurrency markets.
In simpler terms, the Fed’s more assertive stance has cast uncertainty over cryptocurrencies. It influences market sentiment as tighter monetary policies have become necessary.
Most central banks have raised interest rates, with a few exceptions. Simultaneously, Bitcoin’s value declined over the past year, highlighting the interaction between central bank actions and cryptocurrency markets.
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