US and UK Interest Rate Decisions – May 2025

What Did the Federal Reserve Decide in May 2025?

On Wednesday, May 7, 2025, the Federal Reserve said it will keep the target range for the federal funds rate stable at 4.25% to 4.50%. This choice happened during a time of strong political pressure from US President Donald Trump. He has been urging for faster rate cuts to boost economic activity.

Fed Chair Jerome Powell said that the central bank is still focused on checking inflation and keeping financial market stability. The latest data shows that inflationary pressures are still there. The Consumer Price Index (CPI) went up by 2.4% each year, which is higher than the Fed’s target of 2%.

During the FOMC Press Conference, Powell said the Fed is watching “evolving economic conditions” closely. This includes energy prices, the labour market performance, and global tensions. He specifically mentioned concerns about tariffs and conflicts, like the rising issues between India and Pakistan.

Is the Bank of England Cutting Interest Rates?

Yes. The Bank of England (BoE) will likely cut interest rates by 0.25 percentage points. This means the base rate will go down from 4.50% to 4.25%. This change is expected to happen on Thursday, May 8, 2025. It comes after a slowdown in the UK economy. At the same time, CPI inflation decreased to 2.6% in March.

The decision should be agreed upon by everyone, with a vote from the Monetary Policy Committee (MPC) showing 9–0. Governor Andrew Bailey is likely to make a statement when the Monetary Policy Report is released.

Why Is the Bank of England Cutting Rates?

Several key factors influenced this decision:

• UK interest rates feel too tight for the current growth outlook.
• Food prices have steadied since the start of the year, helping lower overall CPI.
• The labour market is showing signs of weakness, with fewer job openings compared to February.
• Global economic activity is slowing because of geopolitical risks and falling trade volumes.
• Market expectations have already included a 25 basis point cut.

What Is the Market Reaction to These Decisions?

Global financial markets were careful in their reactions. In the UK, government bonds increased in value. The yields on the 10-year gilt fell below 3.7%. This is the lowest point since August 2023. The exchange rate for GBP/USD went down a little. Traders expect lower borrowing costs.

In the US, stock markets saw small gains, and mortgage rates stayed the same after the Fed made its decision. The investment director of a big UK brokerage said, “These actions by central banks show their worry about weak demand and growing uncertainty. This is true not only in their own economies but also in Europe, the eurozone, and in global developments overall. These changes often impact currency exchange rates, affecting both consumers and businesses.”

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What Role Does Inflation Play in Interest Rate Policy?

Both the Federal Reserve and the Bank of England change interest rates mainly to control inflation. The Fed aims for an inflation rate of 2%. The BoE has the same target for CPI at 2%. Yet, inflationary pressures have been difficult to manage in recent years because of:

• Global energy prices are unstable.
• Food supply chains are facing disruptions.
• Exchange rates are unpredictable.
• Wages are increasing in tight labor markets.

Both central banks need to find a balance. They are cutting rates, but they are also worried about keeping prices stable in the long run.

How Do These Decisions Affect UK Borrowers and Savers?

A cut in the Bank Rate from 4.50% to 4.25% can significantly impact daily consumers.

Borrowers:

• Mortgage rates are expected to drop a bit in the coming months, especially for tracker and variable-rate loans.
• Interest rates for credit cards and personal loans may also fall slightly.

Savers:

Interest from savings accounts and fixed-rate bonds may decrease. This could make it tougher for savers to stay ahead of inflation.

Banks and lenders usually change their prices after a BoE decision. You can see these changes in financial products within 1 to 2 weeks.

When Are the Next Interest Rate Decisions Scheduled?

What’s the Broader Economic Outlook?

Both central banks are changing their monetary policy to support economies that are slowing down. The Bank of England’s Monetary Policy Committee has suggested that it might lower rates in the future if inflation is kept in check and economic activity stays low.

The Fed is being more careful because of the current political situation. There are tensions between President Trump and Fed Chair Jerome Powell. Comments from Trump during the previous meeting in February showed that he thought interest rates were hurting US growth.

Key Risks to Watch:

• A rise in global conflicts
• New ups and downs in financial markets
• A consistent increase in long-term inflation expectations
• Changes in market forecasts based on new economic data

Correct as of 8th May 2025

FAQs About the May 2025 Interest Rate Decisions

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