MPC Debates Ahead of May 2025: Balancing Inflation Risks and Growth Slowdown

Inflation Outlook and Upside Risks

UK inflation has eased from its 2022 peak but remains above target, and a near-term rebound is expected. Annual CPI was around 3.0% in January 2025, up from 2.5% in December, and is projected to rise to roughly 3¾% by Q3 2025. This anticipated uptick largely reflects energy price dynamics – notably the scheduled April increase in the Ofgem price cap, which reverses some of last year’s declines. The typical household energy bill cap rose from £1,568 in July 2024 to £1,738 in January 2025 and is expected to climb further in April, meaning previous large price drops will drop out of annual comparisons and push inflation higher. Policymakers judge this as a one-off “price cap effect”, but it nonetheless poses an upside risk for inflation in the coming months.

Beyond energy, underlying inflationary pressures remain a concern. Services inflation – a key indicator of domestic price persistence – was running about 5.0% in January, up from 4.4% in December (though slightly lower than the MPC had expected). Various measures of core services inflation “remain elevated” across the board. While underlying services inflation had been on a gradual downward trajectory through 2024, the latest data showed little further improvement into early 2025. The MPC minutes noted that annual underlying services inflation essentially flattened out between December and January. Moreover, a rise in employers’ National Insurance contributions taking effect is likely to feed through into services prices, warranting caution in interpreting services inflation in the coming months. In short, core domestic price pressures (especially in services) are still sticky, which bolsters the argument of MPC hawks that inflation could prove more persistent.

Adding to these concerns, inflation expectations have ticked up, something several MPC members flag as a key upside risk. Recent surveys show households’ short- and medium-term inflation expectations have risen markedly. For example, the Citi/YouGov one-year ahead median inflation expectation jumped to 3.9% in February (from around 3% in late 2024), and the Bank/Ipsos one-year measure rose to 3.4%. Both are notably higher than their pre-pandemic norms (about 2.5% and 3.0%, respectively). Households appear to be reacting to actual price increases – especially for salient items like food and energy – but the MPC warns that these higher expectations “nevertheless [represent] an upside risk to future pay and inflation dynamics” if they become entrenched. Medium-term household expectations have similarly drifted up alongside short-term views.

Businesses, too, are reporting stickier pricing outlooks. The BoE’s Decision Maker Panel survey finds that firms’ year-ahead output price expectations rose to about 4.0% in early 2025, roughly 0.5 percentage points higher than six months prior. Notably, this means companies on average no longer expect their own price inflation to fall in the next year – their expected price growth now slightly exceeds their recent actual price increases. Such a sentiment shift suggests businesses foresee passing on continued cost pressures. Moreover, professional forecasters edged up their views on peak inflation: the average forecast for CPI now sees it peaking around 3.7% in late 2025, up from 3.2% in February’s survey. All of this underscores why upside inflation risks – from sticky services prices to rising inflation expectations – remain central in the MPC’s debate. The Committee has stressed it will monitor for any signs that the coming inflation pickup (driven by energy base effects and regulated prices) might lead to “second-round” effects that keep underlying inflation higher. Those on the MPC urging caution argue that policy must stay sufficiently restrictive to “squeeze out” any persistent inflationary pressures and ensure that inflation returns to the 2% target sustainably in the medium term.

Labour Market Conditions and Pay Growth

Balancing those inflation fears is evidence that the labour market is loosening from the extreme tightness of the past two years. By early 2025, the MPC judged that the UK jobs market was “broadly in balance”. Key indicators of slack have improved: the ratio of vacancies to unemployed persons has fallen back to around its estimated equilibrium level, and firms report that recruitment difficulties have normalised after the acute shortages seen post-pandemic. Unemployment, however, remains low by historical standards (hovering near recent lows), so the labour market hasn’t weakened dramatically – but it is no longer clearly overheated.

Forward-looking metrics point toward a further gradual cooling in employment. The MPC’s March minutes noted a “range of early-stage indicators” of labour demand had “weakened in recent months”. For instance, the S&P Global PMI employment index and the REC jobs survey both slipped to levels consistent with shrinking employment. While not all metrics are this downbeat (vacancy levels have been roughly flat rather than plunging), overall hiring momentum has slowed. HMRC real-time PAYE payroll data show the inflows to payroll jobs have fallen below early-2024 rates (while outflows from jobs have held steady). In other words, hiring has decelerated, even if outright layoffs haven’t spiked. Bank staff estimate underlying employment growth in Q1 2025 was only about 0.1% (quarterly) – essentially stall speed, and notably below the ~0.25% pace of population growth. If employment grows more slowly than the labour force, slack will quietly build. Indeed, the Committee expects a “modest deterioration” in late-lagging indicators like the unemployment rate in coming months, given the clear softening in recruitment and some reports of hiring freezes or pauses by firms. Redundancy notifications remain around normal levels, but agents report that if the outlook doesn’t improve, some companies may resort to reducing staff via attrition or redundancies later in the year. All this suggests the risk of rising unemployment – a downside risk to demand – is on the MPC’s radar as it considers further rate cuts.

A critical piece of the puzzle is wage growth, which straddles the inflation and real-economy debate. On one hand, pay growth has shown signs of cooling: a broad set of wage indicators suggests underlying pay rises have eased in recent months. Pay settlement data collected by the Bank’s agents indicate median pay awards are holding around 3–4%, and businesses in the DMP survey expect pay growth of roughly 3.9% over the next year – a rate that, while above pre-pandemic norms, is markedly lower than the peak wage growth seen in 2022. This trajectory is in line with the MPC’s February forecast that wage increases would gradually slow through 2025. The Bank’s agents report planned average pay raises for 2025 in the 3½–4% range, consistent with this moderation. Such figures are arguably more compatible with the 2% inflation target (especially if productivity growth rebounds modestly). Indeed, the “softening in underlying pay growth” was welcomed by the MPC – it helps alleviate domestic cost pressures.

On the other hand, official wage measures remain elevated, underscoring why some MPC members remain wary of declaring victory over inflation. Headline annual growth in private-sector regular pay (average weekly earnings) unexpectedly jumped to 6.1% in the late-2024 data (three months to January), up from about 4.9% in mid-2024. This acceleration in the official earnings index outpaced what economic fundamentals alone would predict. Bank staff analysis, however, indicates this spike was distorted by compositional effects – for example, shifts in the mix of jobs (more higher-paying full-time jobs) and volatile jumps in pay in a few sectors. Stripping out those volatile sectors brings the wage growth estimate closer to the underlying trend. In short, true underlying pay growth is lower than the 6% figure, though still somewhat above rates consistent with 2% inflation. (Notably, the ONS has signalled it will revise the earnings data methodology, given these quirks.) The MPC’s judgment is that underlying wage growth, while down from its peak, remains elevated and above what’s consistent with the inflation target. This duality in the wage data fuels the MPC’s split views: hawks emphasise that 6% pay growth (even 4–5% underlying) risks feeding persistent inflation in services, whereas doves counter that wage pressures are clearly receding and likely to slow further if the job market cools.

Indeed, one of the most dovish MPC members, Swati Dhingra, has downplayed the significance of the official wage metrics. She argues that the **“rapid” pay growth in the data overstates true pressures because it under-represents smaller businesses and the self-employed. In her view, labour market slack is larger than the headline data suggest, meaning wage-push inflation will ease on its own. Dhingra and others also note that pay expectations among firms are coming down (around 4% as reported) and that wage growth is now primarily being driven by a narrower set of sectors with idiosyncratic trends. This perspective supports a more dovish stance: if wage growth is set to slow and the labour market is no longer tight, then inflation should continue to fall without the need for ultra-high interest rates.

The broader MPC consensus seems to acknowledge the progress on wages – there is evidence that pay pressures have turned a corner – but members remain vigilant. They “continue to monitor closely” pay settlements and other wage data for signals about the future path. The trajectory of pay growth relative to productivity is seen as pivotal for medium-term inflation. In the May decision deliberations, expect the pace of wage moderation to be a central point: has pay cooled enough to confidently cut rates again, or do the still-high nominal wage levels warrant caution until there’s more definitive easing?

Economic Activity and Downside Growth Risks

On the growth side of the ledger, there is accumulating evidence of a weakening economy, which bolsters the case of those MPC members advocating further rate cuts. Recent GDP data have been volatile but generally sluggish. UK GDP eked out a 0.1% expansion in Q4 2024, slightly better than the small contraction the BoE had forecast. That upside surprise was largely due to a one-off bounce in December (0.4% growth that month driven by business services). However, momentum then faltered: GDP fell 0.1% in January 2025, with particular weakness in manufacturing output. Taking the higher Q4 base into account, Bank staff estimated Q1 2025 growth at ~0.25%. While that’s a bit stronger than earlier forecasts (and avoids recession), it’s still a very tepid pace. The overarching view is that UK activity has been “subdued”, reflecting a combination of lacklustre demand and remaining supply constraints. The MPC notes that the slowdown in growth is apparent not just in GDP but across underlying indicators. Importantly, business surveys and forward-looking indicators continue to “suggest weakness in growth” despite the positive official Q4 outturn.

High-frequency survey data paint a cautious picture. The Bank’s Agents and external surveys have reported deteriorating business confidence in late 2024 and early 2025. For instance, the Lloyds Business Barometer and the PMI future output index both fell for multiple months in a row, indicating firms have become more pessimistic about the year ahead. Elevated uncertainty (partly due to geopolitical and trade developments) and rising costs (including taxes) were cited as factors dragging down business sentiment. If such weak sentiment persists, it could translate into weaker investment and hiring, compounding the slowdown. The MPC has acknowledged these risks, observing that the balance of demand and supply in the economy is subject to “significant uncertainties” – but in their central outlook, they see demand growth remaining sluggish relative to potential output growth in the near term.

On the consumer side, conditions are notably fragile. Consumer confidence remains deeply subdued, which is weighing on household spending. The Bank’s February Monetary Policy Report highlighted that around the turn of the year, confidence took another sharp leg down: the GfK headline consumer sentiment index “fell sharply in January [2025]… to its lowest level since December 2023”. Similarly, S&P’s UK consumer sentiment index dropped notably at the start of the year. Households have grown more pessimistic, likely reflecting the squeeze of past inflation and rising borrowing costs. In fact, surveys show savings intentions remain very elevated, as many consumers prefer to build buffers rather than spend. (The MPC does caution that confidence surveys aren’t perfect predictors of spending, but the trend is clear.) Consistent with this gloom, household consumption has been essentially flat – BoE staff estimate zero growth in consumer spending in late 2024. MPC member Swati Dhingra has pointed out that UK consumer spending still hasn’t recovered to pre-pandemic levels, unlike in the US or the Eurozone. She notes “that consumption weakness is just not going away”, citing it as a primary reason she believes monetary policy is too restrictive. Households also appear to be cautious because of the cooling jobs market – Dhingra suggests elevated saving is “in part due to concerns about a falling number of job vacancies” and job security. Overall, weak consumer demand and low confidence form a key plank of the dovish argument for cutting rates again to support spending.

Another factor weighing on the outlook is the global backdrop, which has shifted to the downside. Since the MPC’s last major forecast round in February, global economic uncertainties have intensified. The Bank’s March minutes noted a “further increase in geopolitical and trade policy uncertainty”, including new tariff announcements by the US. The MPC judged that these developments pose downside risks to near-term activity in many advanced economies, “including the United Kingdom”. Data on the UK’s main trading partners underscore these concerns. The euro area barely grew at the end of 2024 – eurozone GDP rose just 0.2% in Q4, and early 2025 indicators remained subdued. Across the Channel, economic sentiment is fragile, and key export markets like Germany are underperforming. Meanwhile, the United States (which saw a solid 0.6% GDP rise in Q4) is expected to slow significantly in 2025. The BoE notes that U.S. growth is set to cool “on the back of tariffs and wider policy uncertainty, among other factors”. Tellingly, indicators for Q1 2025 in the U.S. show weakening household consumption growth and falling consumer confidence, along with softer business output and investment expectations. This U.S. slowdown matters for the UK via trade and financial channels. In sum, the external environment is becoming less supportive: Europe’s growth is stalling and U.S. demand is waning, which could hit UK exports and industrial activity. UK policymakers are also watching China, where growth is expected to slow in early 2025 as previous stimulus fades.

All these factors feed into the MPC’s deliberations. Those emphasising downside risks argue that, with UK domestic demand weak (flat consumption, cautious businesses) and global growth weakening, the greater risk is an unnecessary slowdown or even recession if policy remains too tight. Indeed, within the MPC, there has been debate about how much of the UK’s anaemic growth is due to weak demand (amenable to monetary stimulus) versus supply-side constraints. Dhingra remarked that this distinction is a “key difference among MPC members” – “From my point of view, I think a lot of it is actually demand that is generally weak”, she said. If demand is the issue, cutting rates could help boost spending and growth without stoking inflation. By contrast, if supply factors (e.g. weak productivity or reduced labour supply) are the main culprit, then low growth could coexist with inflation risk – a scenario the hawks worry about. The majority on the MPC acknowledge both demand and supply have contributed to the recent stagnation, but they are weighing how much more policy “restriction” the economy can bear given signs of excess supply emerging over the next couple years (the Feb forecast saw slack widening to around 0.75% of GDP).

Crucially, the MPC’s March statement struck a balanced tone: it noted that if there is “greater or longer-lasting weakness in demand relative to supply,” that would “warrant a less restrictive path of Bank Rate” (i.e. more/faster rate cuts). The Committee is clearly open to easing further if the downturn intensifies. Conversely, it also warned that if inflationary pressures prove more persistent – say, due to “more constrained supply… and more persistence in domestic wages and prices” – then policy might have to be tighter than expected. This symmetric guidance encapsulates the debate: upside inflation risks vs. downside growth risks. Heading into the May 2025 decision, the data on growth and employment have tilted more to the downside, giving the doves ammunition to argue for another cut, while inflation and expectations data have posed reminders that the fight against inflation is not yet “won,” bolstering the case for caution. The May meeting’s core debate will revolve around which risk – resurgent inflation or prolonged stagnation – looms larger.

Financial Conditions and Yield Curve Signals

Since the February meeting, markets have turned choppy, but the ripples have broken unevenly. In the United States, Treasury yields have fallen, and the S&P 500 is off roughly 10 per cent, a move investors blame on growth worries and tariff angst. Continental Europe has gone the other way: news of a looser German fiscal stance sent Bund yields up by thirty basis points in a single session – the sharpest daily jump in more than three decades – and lifted the euro and Euro-area equities. By contrast, the UK reaction has been muted: gilt yields have edged higher, sterling has firmed a touch, and the FTSE is broadly unchanged.

For the MPC, that modest rise in gilt yields matters. Because market-based inflation compensation has stayed anchored near 2 per cent, each tick up in nominal rates translates directly into higher real borrowing costs. Together with a Bank Rate still at 4.5 per cent, that means the ex-ante real policy rate is now positive – a sharp turnaround from the deeply negative territory of 2023. In other words, monetary conditions are tightening further even without any new action from Threadneedle Street.

The Bank’s own Market Participants Survey underlines the uncertainty. The median respondent still looks for about 75 basis points of cuts over the rest of 2025, yet option-style answers show the distribution is skewed to fewer moves if inflation proves sticky; market pricing is even more cautious at a touch over 50 bp. Investors, then, expect the BoE to ease—but only gradually, and only as long as the data cooperate.

Pass-through to households and firms remains textbook in one respect and awkward in another. Floating-rate mortgage payments have fallen one-for-one with Bank Rate, but most fixed deals are only now refinancing, so the average mortgage rate paid is still climbing. Sight-deposit rates, meanwhile, have come down more slowly than policy rates. Taken together, the Bank judges that overall credit conditions are “broadly normal”, yet still on the restrictive side of neutral.

The yield curve itself carries the punch line. Short-end inversion says markets believe cuts are coming; a stubbornly high long end says real returns remain juicy enough to reward waiting. That combination tightens financial conditions today and defers consumption and investment, precisely the opposite of the Mervyn King “bring-forward” effect QE once sought. Whether the MPC chooses to counter that incentive with another policy-rate cut, or by reshaping its balance sheet to pull long yields lower, is the crux of the debate around the table this afternoon.

Fed and ECB Perspectives on Policy Trade-offs

The Bank of England’s internal debate is playing out against a broader international backdrop where other central banks face similar dilemmas. Recent commentary from the U.S. Federal Reserve and the European Central Bank highlights the shared challenge of waning growth momentum versus residual inflation risks. While the BoE focuses on UK-specific developments, it is certainly attuned to these global policy signals.

In the United States, the Fed has shifted to a more cautious, hold-steady stance as it balances two-sided risks. In mid-April 2025, Fed Chair Jerome Powell noted that the U.S. economy, though resilient so far, is entering a period of heightened uncertainty and downside risk. Growth has clearly slowed in early 2025 from the robust pace of 2024, with first-quarter data showing modest consumer spending growth and a drag from net exports (exacerbated by businesses pulling imports forward ahead of new tariffs). Powell highlighted a “sharp decline in sentiment” among households and businesses, with elevated uncertainty “largely reflecting trade policy concerns.”. This deterioration in confidence is leading many forecasters to mark down growth projections, although most still expect continued positive growth rather than an outright contraction. In other words, the Fed sees storm clouds forming (trade tensions, weaker demand) that could slow the economy further.

At the same time, the U.S. labour market remains solid. The Fed assesses that employment is “at or near” maximum levels – unemployment has stayed low (around 3.5–3.6%) as job gains moderate. In the first quarter, payroll growth averaged about 150k jobs per month, a clear comedown from 2024 but enough to keep unemployment stable. Importantly, like the BoE, the Fed now judges that the U.S. labour market is “broadly in balance”: the ratio of job openings to unemployed has fallen back near pre-pandemic norms (just above 1), and wage growth has continued to moderate. Powell noted wages are still rising a bit faster than inflation, but the slowing trend suggests the labour market is “not a significant source of inflationary pressure” at present. This mirrors the BoE’s observation of easing pay pressures and gives the Fed some breathing room on inflation.

On inflation itself, U.S. price trends have improved substantially – a point Powell underscored – yet inflation is not fully vanquished. Thanks to aggressive Fed tightening in 2022–23, inflation has come down “a great deal” from its peak. By March 2025, U.S. headline PCE inflation was ~2.3% and core PCE ~2.6% year-on-year, which is very close to the 2% goal. However, Powell described inflation as still “running a bit above” target. Moreover, new developments – particularly the tariff increases enacted by the new U.S. administration – threaten to push inflation higher in the coming months. Fed analysis indicates the scale of tariffs announced is larger than anticipated and likely to have non-trivial effects: higher import prices feeding into inflation and slower growth due to trade disruptions. Indeed, both survey-based and market-based measures of near-term inflation expectations in the U.S. have jumped up significantly, and respondents explicitly cite the tariff news as the driver. (By contrast, longer-term inflation expectations remain well anchored in the U.S., much as in the UK, with market 5yr5yr breakevens still ~2%.) The Fed thus faces a similar quandary: inflation is near target but could re-accelerate due to one-off shocks, even as the economy slows.

Powell’s bottom line was that the Fed can afford to be patient and data-dependent at this juncture. He stated that the Fed is “well positioned to wait for greater clarity before considering any adjustments” to rates. In effect, the Fed is on hold (the FOMC in March left the policy rate at 4.25–4.50%, after having trimmed it from last year’s highs) and will watch the incoming data. Powell explicitly acknowledged the possibility of being in a “challenging scenario” where the Fed’s dual goals (full employment and 2% inflation) could come into tension – much like the BoE’s current situation of low unemployment but above-target inflation. If that occurs, he said, the Fed will weigh how far the economy is from each goal and over what horizon those gaps might close. This is essentially the balancing act: if inflation risks pick back up (e.g. tariff-driven) the Fed might have to hold off or even re-tighten, but if growth really cracks and unemployment rises, the Fed would pivot to cuts. For now, Powell signalled no rush to either cut or hike, emphasising that waiting is the prudent course until they see more clearly the effects of trade policies and the broader outlook. He also reiterated the Fed’s commitment to keep longer-term inflation expectations anchored and not allow a one-time price level increase (from tariffs) to “become an ongoing inflation problem”. This Fed stance – pausing with a bias that could tilt either way – provides context for the BoE: the global trend among central banks is to move carefully and avoid premature easing that might jeopardise hard-won disinflation, yet remain ready to support growth if conditions deteriorate.

In the Euro Area, the European Central Bank has already been in an easing cycle and echoes many of the same themes. The ECB Governing Council’s decision in April 2025 was to cut rates by 25 bps (bringing the deposit facility rate to 2.5%) amid signs that inflation is coming under control. ECB President Christine Lagarde struck an optimistic note on inflation: “The disinflation process is well on track.” In her April 17th press conference, she noted that headline and core inflation both declined in March, and importantly **services inflation “eased markedly” in recent months. Most measures of underlying inflation suggest price growth will settle around 2% on a sustained basis, according to Lagarde. Contributing to this improved outlook, wage growth is moderating in the euro area, and firms’ profit margins are no longer expanding (profits had actually started to buffer some of the impact of past wage rises). All of this implies that domestic inflationary pressures are gradually abating. In fact, by March, the eurozone’s annual inflation was down to 2.2% – essentially almost at target.

However, much like the BoE and Fed, the ECB is facing increasing growth headwinds and uncertainty. Lagarde warned that the economic outlook is “clouded by exceptional uncertainty.” A significant factor is the same trade rift affecting the UK and the U.S.: rising global trade tensions and new barriers. The U.S. tariffs and retaliatory measures are expected to have an impact on Europe as well. Lagarde even commented that U.S. tariffs could have a disinflationary impact in Europe (if they weaken demand enough), though they also pose upside price risks on specific goods. In general, the ECB sees that elevated uncertainty is denting confidence among businesses and households. Survey indicators show euro firms becoming more cautious, and consumers potentially holding back on spending due to fear of what’s ahead. Additionally, the volatility in financial markets (partly driven by those trade worries) is tightening financing conditions in the euro area – credit has become costlier and harder to obtain for some, even beyond the deliberate tightening from ECB policy. In Lagarde’s words, these factors “further weigh on the economic outlook” for Europe. Indeed, Eurozone growth has been weak: output barely grew in late 2024 and was expected to only “have grown in the first quarter” at a modest pace, with manufacturing showing signs of stabilising but no robust rebound. On the plus side, the euro area labour market remains historically strong (unemployment at a record low 6.1% as of Feb), which supports incomes. But overall, the ECB’s message is that while inflation is coming down to target, the economy is also losing momentum, presenting a classic policy trade-off.

Given this backdrop, the ECB’s approach has been very much in line with the BoE’s data-dependent, balanced stance. Lagarde emphasised determination to ensure inflation returns to 2% sustainably, but “especially in current conditions of exceptional uncertainty,” the ECB will “follow a data-dependent, meeting-by-meeting approach” and is “not pre-committing to a particular rate path.”. This mirrors the BoE’s avoidance of explicit forward guidance in favour of flexibility. The ECB has already executed multiple rate cuts (Lagarde noted the April cut was the euro’s seventh cut in a year), but she signalled caution going forward. Essentially, the ECB will evaluate the inflation outlook (improving) against the incoming economic and financial data (deteriorating) each time. For example, if core inflation unexpectedly stalled or wage moderation reversed, the ECB might slow or pause cuts despite growth concerns. Conversely, if the economy weakened more than expected, they could continue cutting. This is the same balancing act the BoE’s MPC finds itself in. Both are trying to ease off the brake gradually without rolling the car backwards.

In Lagarde’s April remarks, one can hear an almost point-by-point echo of the BoE’s concerns: services inflation – while better – is still somewhat high (3.5% in March for euro services), trade tensions and geopolitical risks are a key cloud on the horizon, confidence is fragile, and financial conditions need monitoring. Even the labour market parallel is strong: euro unemployment is at a record low, similar to the UK’s near record-low jobless rate, yet that strength isn’t translating into excess inflation now that wages are calming. So, like the MPC, the ECB is weighing upside inflation risks (which in their case are mostly about ensuring core inflation keeps trending down and inflation expectations stay anchored) against downside growth risks (a potentially sharper slowdown due to global and domestic drags).

For the Bank of England’s MPC, these Fed and ECB perspectives provide both validation and caution. They validate the MPC’s focus on inflation expectations and services inflation (as these are universal concerns among central bankers) and its cautious pace of easing – all major central banks are reluctant to declare victory too soon. At the same time, they highlight the importance of upside risks like tariffs or other shocks that could complicate the disinflation path, reinforcing arguments by MPC hawks that the job is “not done” until inflation is truly at 2%. They also underscore the global nature of the growth slowdown – weakness in the U.S. and Europe could rebound onto the UK, suggesting to MPC doves that erring on the side of more support might be prudent.

In conclusion, the core debate within the MPC ahead of the May 2025 decision centres on how to balance these forces. Inflation is falling but could plateau above target if domestic price pressures don’t relent; meanwhile, the economy is lacklustre and faces rising recessionary risks. MPC members are parsing data on inflation expectations, wage settlements, and services prices to judge how persistent inflation might be, even as they sift labour market numbers, consumer confidence surveys, and global indicators to gauge how rapidly the economy is cooling. They are also mindful of financial conditions: real interest rates have swung from deeply negative to positive, yield curves imply future easing but with uncertainty, and credit dynamics show policy is still biting. The “upside risks” camp on the MPC points to things like the April energy price cap effect, sticky core inflation, and climbing expectations as reasons to be very careful about cutting rates too fast, lest inflation momentum reignite. The “downside risks” camp counters with evidence of an economy losing steam – slowing PAYE job growth, weak consumer spending and sentiment, and external weakness – arguing that failing to support growth now could mean undershooting the inflation target later as slack widens. Both camps also keep one eye on what the Fed and ECB are doing, since a sharp divergence or surprise abroad could spill over. At the May meeting, we can expect a lively discussion weighing upside inflation factors like services prices and wages against downside growth factors like cooling labour demand and global drags. The outcome – whether the BoE cuts rates again or holds – will hinge on which risk the Committee ultimately finds more compelling to address right now. As the MPC put it in March, monetary policy needs to remain “restrictive for sufficiently long” to be sure inflation will return to 2%, but it must also avoid being overly restrictive if the economy is “weak relative to supply”, so as not to oversteer into a downturn. This delicate balancing act, playing out in their official communications and minutes, defines the core of the debate leading up to the May 2025 rate decision.

Sources: Bank of England MPC Minutes and Monetary Policy Report (Feb–Mar 2025); Bank of England Agents’ and DMP surveys; Remarks by MPC member Swati Dhingra; U.S. Federal Reserve Chair Powell’s April 2025 speech; European Central Bank April 2025 Press Conference; Bank of England Market Participants Survey summary; BoE Monetary Policy Summary, March 2025.

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