The Bank of England’s governor, Andrew Bailey, emphasised the need for a gradual approach to altering monetary policy. The future easing of monetary restraint will depend on inflation trends, as recent price rises could accelerate inflation. The direction of interest rates is downward, but the neutral rate remains uncertain. Bailey has not changed his stance on the overall direction of the rate path, though the timeline is uncertain.

The BOE did not explicitly discuss recession risks, and their activity outlook is mostly unchanged since May. Bailey plans to detail his views in an upcoming Treasury Select Committee briefing. Food prices are expected to rise further, according to Lombardelli.

Bank Rate Vote

The recent bank rate vote required two rounds due to differing opinions on the extent of rate cuts. Five members favoured a cut, while four opposed, including Lombardelli unexpectedly. This suggests the BOE might pause rate cuts in September, with November decisions depending on upcoming UK data.

Based on these comments from the Bank of England, we should expect a pause in rate cuts at the September meeting. The market had been getting ahead of itself, but the cautious tone and the close 5-4 vote for the last cut signal a reluctance to move too quickly. This means the path for interest rates will be shallower than many had anticipated.

The latest data from the ONS supports this cautious stance. While headline CPI for July 2025 fell to 2.3%, core inflation, which excludes volatile items, remained stuck at 3.5%, and services inflation actually ticked up. Furthermore, average weekly earnings data released last week for the quarter ending in June showed wage growth at a surprisingly strong 4.8%, fueling fears of persistent domestic price pressures.

For traders, this suggests that derivatives pricing in aggressive cuts for the autumn are misaligned. Selling short-sterling or SONIA futures contracts for the September and November expiries looks like a sensible position. We are essentially betting that the Bank of England will hold rates steady for longer than the market currently expects.

Market Implications and Trading Strategies

This hawkish surprise should also be supportive for the pound. With the Federal Reserve having already delivered more cuts this year, the interest rate difference is moving in favour of sterling. We see an opportunity in going long on GBP/USD, as a pause from the BOE contrasts with a more dovish stance elsewhere.

The explicit mention of “genuine uncertainty” also points towards higher volatility around key UK data releases and BOE meetings. Buying options, such as straddles on SONIA futures, could be an effective way to trade this uncertainty without picking a specific direction. This strategy profits if rates move significantly either up or down as the market digests new information over the coming months.

Looking back, this period feels very different from the aggressive hiking cycle of 2023 and the initial, more confident rate cuts earlier this year. The split vote, with a key policymaker like Lombardelli surprisingly voting against a larger cut, shows a deep division within the committee. This internal disagreement is the primary source of the market’s uncertainty and will make upcoming inflation and jobs reports extremely important.

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