Bank of England Base Rate Now 4%
The Bank of England’s (BoE) Monetary Policy Committee (MPC) has voted to hold the Bank of England base rate at 4%. This decision marks the first pause in the gradual rate-cutting cycle, which began in August 2024.
Furthermore, the decision was close, with a 5-4 split vote, suggesting that the future path for interest rates UK is becoming increasingly finely balanced. The BoE is signaling a cautious approach as it seeks to be entirely confident that inflation is fully under control.
CPI Inflation is Judged to Have Peaked
A key announcement from the BoE is the confirmation that CPI inflation is judged to have peaked.
- Peak Rate: UK inflation was recorded at 3.8% in September, which was lower than the 4% peak the Bank of England had forecast earlier in the year.
- Disinflation Progress: The Bank of England believes that progress on underlying disinflation continues. This is being supported by both easing pay growth and subdued economic growth. The latest Monetary Policy Report predicts that inflation is likely to fall below 3% early next year, before gradually returning towards the 2% target over the subsequent year.
BoE Split 5-4 on Rate Cut – Governor in the Majority
The Bank of England’s decision to hold the Bank of England base rate now at 4% was unexpected to be so tight, reflecting a divided committee on the next step.
- Governor’s Rationale: Andrew Bailey, who held the decisive vote, acknowledged that the upside risks to inflation have become less pressing. Nevertheless, he preferred to “wait and see” if the disinflation is confirmed by upcoming economic data before voting for a cut.
- Dovish Views: Conversely, four members voted for a quarter-point cut, arguing that the BoE interest rate policy was already overly restrictive. They attached greater weight to the downside risks that the current economic slack and high household savings will weigh on consumption, potentially leading to an undershoot in inflation.
Bailey Blames Weak Growth for Falling Inflation
Governor Bailey explicitly linked the recent fall in inflation to a slowdown in activity, noting that “further disinflation is being underpinned by subdued economic growth.”
- Economic Weakness: The Governor warned there is a risk that activity “cools too much or for too long.” Consequently, the unemployment rate is expected to rise to a higher peak above 5% early next year, driven by falling job vacancies and slowing hiring.
- Forward Guidance: The BoE also made a dovish tweak to its forward guidance. The committee replaced its previous phrase about taking a “gradual and careful approach” to cutting rates with a more direct statement: “If progress on disinflation continues, Bank Rate is likely to continue on a gradual downward path.”
Budget Tax Fears Harming Growth
The Bank of England also issued a clear warning that uncertainty surrounding the upcoming Budget is actively harming business and household confidence.
- Uncertainty Surge: Policymakers stated that speculation over Chancellor Rachel Reeves’s tax-raising Budget on November 26 has likely contributed to recent economic weakness. A Bank survey indicated that businesses do not expect demand to pick up until partway through 2026 due to this uncertainty.
- Policy Impact: Furthermore, existing government policies, such as the increase in employer National Insurance, were explicitly blamed for firms cutting back on employment, thus exacerbating the slack in the labor market. The Bank of England will receive the full details of the Budget before its next meeting.
December Rate Cut Bets Surge
The tight vote split and the Governor’s conditional openness to easing have caused market expectations for a Bank of England base rate change today in December to surge.
- Market Repricing: Investors are now pricing a roughly 65% chance of a reduction in the BoE base rate next month. This is because by mid-December, the MPC will have key inflation and jobs data for October and November, as well as the final details of the Budget.
- Fiscal Tightening: If the Budget delivers the widely expected fiscal tightening (tax increases), it could further slow the economy, providing the final piece of evidence needed for the BoE to make another Bank of England interest rate cut.
Conclusion
The Bank of England holding the interest rates at 4% reflects a balanced, yet cautious, approach. While inflation has peaked, the MPC is waiting for more conclusive data, especially in light of the impending fiscal decisions.
The BoE base rate is still expected to fall gradually, but the timing of the next interest rates UK cut will be dictated by the evidence of disinflation and the impact of the Budget.
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