Hawkish Vote Split at Bank of England Highlights Persistent Price Pressures, Says Berenberg

The Bank of England’s Monetary Policy Committee (MPC) delivered a stark reminder of the challenges facing central bankers in a world of shifting inflation dynamics. On May 8, 2025, the MPC voted 5-4 to cut the benchmark interest rate by 0.25 percentage points to 4.25%, reflecting deepening divisions over how aggressively to ease monetary policy amid persistent price pressures. Two members, Swati Dhingra and Alan Taylor, pushed for a more aggressive 0.50% cut, while Chief Economist Huw Pill and Catherine Mann dissented, advocating for no change. This split, analyzed by Berenberg’s Senior UK Economist Andrew Wishart, underscores a pivotal tension between supporting economic growth and controlling inflation—a tension likely to shape UK financial markets for months.

The Hawkish Split and Its Implications

The vote split was notable not only for its narrow margin but also for its hawkish tilt. Pill and Mann’s opposition to any rate cut signaled concerns that markets had overestimated the likelihood of aggressive easing. Wishart highlighted that this dissent reflected worries about market expectations for rapid rate reductions and the stickiness of core inflation, which remains elevated due to wage growth and tax hikes. Meanwhile, the majority’s decision to cut rates by 0.25% aimed to counterbalance external headwinds, such as U.S. President Donald Trump’s tariffs on global trade, which threaten to slow growth.

The MPC’s retained “gradual and careful” guidance for future cuts further tempered expectations. As Wishart noted, this language ruled out immediate further easing, with June’s rate decision now priced at less than a 20% probability.

Inflation Dynamics and Policy Constraints

Berenberg’s analysis ties the vote split directly to the Bank’s cautious stance toward persistent inflation. While the Bank projects inflation to fall to 2% over the medium term, near-term risks remain elevated. Wishart emphasized that core inflation—excluding volatile items like energy and food—is expected to rise to 3.7% in 2025 before easing. This reflects structural challenges, such as weak productivity growth and lingering wage rigidities, which could keep upward pressure on prices.

The Bank’s revised estimate of the long-run equilibrium interest rate (R)—now 2.25-4.0%, up from 2-3% in 2018—further signals that rates will remain higher for longer than in previous cycles. This adjustment reflects the MPC’s acknowledgment of persistent inflation risks and the diminished room for aggressive easing.

Market Reactions and Investment Implications

Financial markets initially overreacted to the dovish elements of the vote split, with gilt yields falling briefly. However, the hawkish undertones soon dominated, pushing 2-year gilt yields up by 7 basis points to 4.35% as investors recalibrated expectations. Sterling rose 0.2% against the dollar, signaling reduced bets on near-term cuts.

Berenberg forecasts two more rate cuts by year-end, bringing the terminal rate to around 4%. This hinges on data confirming a moderation in wage growth (projected to slow to 3.75% by 2025) and no second-round inflation effects from global trade tensions. Investors should monitor:
- Wage growth trends: A key indicator of core inflation persistence.
- Global trade dynamics: U.S. tariffs could amplify or alleviate price pressures.
- Gilt yields: Reflecting market expectations for the policy path.

Conclusion: Caution Amid Uncertainty

The May MPC meeting underscored that the Bank of England is navigating a narrow path between supporting growth and curbing inflation. Berenberg’s analysis provides a clear roadmap: while further cuts are likely by year-end, they will be data-dependent and contingent on resolving uncertainties around wage dynamics and global trade.

With the Bank’s terminal rate projected at 4%—a significant elevation from its 2018 norms—the era of ultra-low rates is clearly over. Investors must factor in the new normal of higher-for-longer rates, particularly in fixed-income markets. The vote split also highlights that persistent inflation risks, driven by structural issues like weak productivity, will limit the scope for aggressive easing.

For now, the market’s focus shifts to August, when clearer data on the impact of April’s tax hikes and wage adjustments will likely inform the next move. Until then, the Bank’s “gradual and careful” mantra remains the dominant theme—a reminder that inflation’s grip on the UK economy is far from broken.

This analysis synthesizes the MPC’s internal divisions, Berenberg’s inflation-linked rationale, and market reactions to paint a picture of cautious policymaking in an uncertain environment. The path forward hinges on data—and the Bank’s ability to balance competing risks without destabilizing growth or inflation expectations.