The Bank of England has narrowly voted to keep interest rates on hold but opened the door to a pre-Christmas cut – which could provide a boost for millions of borrowers.
Members of the Bank’s Monetary Policy Committee (MPC) voted by a 5-4 majority to leave rates on hold at 4 per cent.
But the MPC believes that inflation has now ‘peaked’ and if it falls as predicted by the end of this year the Bank could be ready to cut in December.
That would also give officials the chance to weigh up the impact of this month’s Budget, which is widely expected to deliver painful tax cuts likely to squeeze the economy.
The Bank said recent UK growth had been ‘subdued’ partly due to uncertainty ahead of the Budget while the Chancellor’s £25 billion raid on employer national insurance, announced a year ago, was continuing to weigh on jobs.
MPC members were split between those who are more worried about price rises persisting and others who believe they are fading – and are worried about weakness in the economy.
Wait and see: Bank of England Governor Andrew Bailey held the casting vote
Bank governor Andrew Bailey effectively held the casting vote – and said he would ‘prefer to wait’ to see the path of falling inflation ‘confirmed in upcoming economic developments’ before cutting.
That appeared to be a strong hint that Mr Bailey will swing the MPC into voting for a cut next month – if inflation falls as expected.
The Bank believes it peaked at 3.8 per cent in September and will fall to 3.6 per cent in October and 3.4 per cent or 3.5 per cent in November. It had previously forecast that inflation would hit 4 per cent this year.
Inflation remains well above the MPC’s 2 per cent target – which is not expected to be hit until 2027.
Mr Bailey said: ‘We held interest rates at 4 per cent today.
‘We still think rates are on a gradual path downwards, but we need to be sure that inflation is on track to return to our 2 per cent target before we cut them again.’
Interest rates have fallen from 5.25% to 4% since August last year
Shadow Chancellor Sir Mel Stride said: ‘Interest rates are staying higher for longer because Rachel Reeves does not have a plan or a backbone.
‘With inflation running at almost double the target rate, families are facing rising prices in the shops. The UK has the highest inflation in the G7 thanks to Rachel Reeves Jobs Tax and reckless borrowing spree. And yet she is once again preparing to hike taxes, leaving us trapped in a doom-loop.
‘Ordinary people are paying the price because Labour cannot reduce spending.’
The decision was published alongside the Bank’s quarterly monetary policy report.
It said: ‘The risk from greater inflation persistence has become less pronounced recently and the risk to medium-term inflation from weaker demand more apparent.
‘But more evidence is needed on both before cutting Bank rate further. The MPC will reassess the inflation outlook and balance of risks at its December meeting.’
The Bank slightly upgraded its forecast for UK gross domestic product (GDP) growth for 2025, from 1.2 per cent to 1.5 per cent, after a better than expected start to the year.
But it expects that this will slow to 1.2 per cent in 2026.
Growth has been weighed down by weaker than exports to the US amid Donald Trump’s tariff war as well as disruption caused by the cyber attack on Jaguar Land Rover, Britain’s biggest car maker.
The Bank expects weak growth to pick up
Meanwhile, household spending and business confidence has been weak, the Bank said, while growth in employment remains ‘close to zero’.
That is partly due to Labour’s employer national insurance raid and minimum wage hike in the last Budget. A Bank survey of firms showed that nearly half of firms had cut employment more than they would have done in response to the NI changes.
The poll painted a picture of a ‘flat economy’ with companies ‘uncertain about potential announcements in the upcoming autumn Budget’ while US tariffs ‘are constraining goods exports’.
And it said consumers remain cautious ‘and prefer saving to overspending’.
Inflation is forecast to come down but only slowly
Fashion retailers are feeling the effect as shoppers flock to second-hand retailers instead while hotels are seeing shorter stays and later bookings and diners are spending less on their visits to restaurants.
Worries about the Budget are also weighing on the housing market and households are even changing their supermarket shopping habits to reduce spending ‘such as buying more vegetables and reducing meat consumption’.
It comes as the Chancellor faces warnings from business not to impose ‘death by a thousand taxes’ when she delivers her Budget in three weeks’ time.
Meanwhile, the boss of Marks & Spencer’s revealed that customers are worried about what it could bring – amid increasing speculation that Ms Reeves will announce a manifesto-busting increase in income tax.
It said: ‘The risk from greater inflation persistence has become less pronounced recently and the risk to medium-term inflation from weaker demand more apparent.
‘But more evidence is needed on both before cutting Bank rate further. The MPC will reassess the inflation outlook and balance of risks at its December meeting.’
The Bank slightly upgraded its forecast for UK gross domestic product (GDP) growth for 2025, from 1.2 per cent to 1.5 per cent, after a better than expected start to the year.
But it expects that this will slow to 1.2 per cent in 2026.
Growth has been weighed down by weaker than exports to the US amid Donald Trump’s tariff war as well as disruption caused by the cyber attack on Jaguar Land Rover, Britain’s biggest car maker.
Meanwhile, household spending and business confidence has been weak, the Bank said, while growth in employment remains ‘close to zero’.
That is partly due to Labour’s employer national insurance raid and minimum wage hike in the last Budget. A Bank survey of firms showed that nearly half of firms had cut employment more than they would have done in response to the NI changes.
The poll painted a picture of a ‘flat economy’ with companies ‘uncertain about potential announcements in the upcoming autumn Budget’ while US tariffs ‘are constraining goods exports’.
And it said consumers remain cautious ‘and prefer saving to overspending’.
Fashion retailers are feeling the effect as shoppers flock to second-hand retailers instead while hotels are seeing shorter stays and later bookings and diners are spending less on their visits to restaurants.
Worries about the Budget are also weighing on the housing market and households are even changing their supermarket shopping habits to reduce spending ‘such as buying more vegetables and reducing meat consumption’.
It comes as the Chancellor faces warnings from business not to impose ‘death by a thousand taxes’ when she delivers her Budget in three weeks’ time.
Meanwhile, the boss of Marks & Spencer’s revealed that customers are worried about what it could bring – amid increasing speculation that Ms Reeves will announce a manifesto-busting increase in income tax.
Responding to the Bank’s latest decision, the Chancellor said: ‘Under this Government, we have seen five interest rate cuts that have helped bring down costs for families and businesses and today’s forecast shows that inflation is due to fall faster than previously predicted.
‘At the Budget later this month I will take the fair choices that are necessary to build the strong foundations for our economy so we can continue to cut waiting lists, cut the national debt and cut the cost of living.’
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