May 2025 Currency Market Review: Bank of England Cuts Rates as Inflation Set to Rise

May 2025 saw the Bank of England deliver its second interest rate cut of the year, as policymakers responded to progress on disinflation but warned of a temporary rise in inflation ahead. Currency markets reflected this shift, with the pound, dollar, euro, and yen all responding to evolving central bank guidance and economic data.

British Pound (GBP)

At its meeting ending on 7 May 2025, the Bank of England’s Monetary Policy Committee (MPC) voted by a narrow majority of 5–4 to reduce Bank Rate by 0.25 percentage points, from 4.5% to 4.25%. Two members preferred a larger cut to 4%, while two others voted to keep the rate at 4.5%. This move marked the fourth rate cut since August 2024.

The decision followed substantial progress on disinflation over the previous two years, as external shocks receded and tighter policy helped curb inflation expectations. Twelve-month CPI inflation fell to 2.6% in March 2025, down from 2.8% in February. However, the MPC cautioned that inflation was likely to rise temporarily to around 3.7% later in the year, mainly due to higher energy prices, before falling back to the 2% target.

Underlying UK GDP growth was judged to have slowed since mid-2024, and the labour market continued to loosen. While pay growth remained elevated, a significant slowdown was expected over the rest of the year. Household inflation expectations had also ticked up recently.

Sterling traded in a narrow range, with markets focused on the Bank’s guidance that further rate cuts would be gradual and data-dependent.

US Dollar (USD)

The US Federal Reserve held its policy rate steady at 5.25% to 5.5% during May 2025. Market participants continued to monitor US inflation and labour market data, with the Fed signalling a cautious and patient approach to any future policy changes.

 Euro (EUR)

The European Central Bank did not hold a policy meeting in May 2025. The ECB’s previous guidance remained unchanged, with rates held steady as Eurozone inflation continued to ease, though still above target. The euro traded in a narrow range, reflecting the region’s cautious economic outlook.

 Japanese Yen (JPY)

The Bank of Japan did not hold a policy meeting in May 2025. The BoJ maintained its ultra-loose monetary policy stance, keeping its short-term policy rate unchanged. Japanese inflation data showed price growth near the BoJ’s target, while other indicators pointed to modest improvement. The yen remained sensitive to global risk sentiment and speculation about future policy moves.

Key Economic Events and Releases in May 2025

Central Bank Actions:

• Bank of England: MPC meeting ending 7 May, rate cut from 4.5% to 4.25% (5–4 vote)

• US Federal Reserve: No meeting, rates held at 5.25% to 5.5%

• European Central Bank: No meeting, rates unchanged

• Bank of Japan: No meeting, rates unchanged

Major Data Releases:

• UK: CPI inflation fell to 2.6% in March, expected to rise temporarily to 3.7% later in 2025; GDP growth slowing; labour market loosening

• US: CPI inflation, labour market data, retail sales

• Eurozone: CPI inflation, business sentiment, PMIs

• Japan: Inflation, machinery orders, GDP

Outlook

May 2025 reinforced the Bank of England’s cautious, data-driven approach to policy easing. With inflation expected to rise temporarily but set to return to target, and with growth subdued, markets looked ahead to further central bank decisions and economic releases for clearer signals on the policy outlook. The pound, dollar, euro, and yen all traded in response to shifting expectations, as attention turned to the trajectory of inflation and monetary policy for the remainder of the year.