Hold steady! The Bank of England keeps the interest rate unchanged at 4%, and expectations for a rate cut in December are rising
This is the first time the Bank of England has paused its consecutive rate cuts since the easing cycle began in August last year. The minutes of the meeting show that Bailey is the most dovish official in the camp maintaining interest rates, judging that the inflation risks "have recently decreased and become more balanced." The Bank of England has revised its policy guidance, stating that interest rates "may continue along a gradual downward path," removing the term "cautious" from the previous statement
The Bank of England maintained the interest rate at 4% with a narrow majority vote, but the shift in policy stance has opened up space for a potential rate cut next time. This decision highlights the increasing divisions within the Monetary Policy Committee, with Governor Bailey's position becoming a decisive factor.
On Thursday, the Bank of England kept the interest rate unchanged, with the voting results showing that five members, including Bailey, supported maintaining the rate, while four members advocated for a 25 basis point cut to 3.75%. This is the first pause in the consecutive rate cuts since the rate cut cycle began last August. The minutes of the meeting indicated that Bailey was the most dovish official among those supporting the rate hold, judging that inflation risks "have recently decreased and become more balanced."
The Bank of England revised its policy guidance, stating that interest rates "may continue along a gradual downward path," removing the term "cautious" from previous statements. This change in wording has prompted the market to increase bets on monetary easing in the coming months. Traders currently expect a rate cut of about 51 basis points by mid-2026, up from 47 basis points before the decision.
Increasing Divisions in the Committee
Under the reformed communication mechanism of the Bank of England, members of the Monetary Policy Committee were able to explain their voting reasons individually for the first time. Bailey stated that "the upside risks to inflation have become less pressing since August," and he chose to maintain the rate to await more evidence.
Bailey added that his position reflects the "forward-looking Taylor rule" interest rate path, which the Bank of England documents indicate means three more rate cuts in the coming year.
Those who voted the same as Bailey include Deputy Governor for Monetary Policy Clare Lombardelli, Chief Economist Huw Pill, and external members Catherine Mann and Megan Greene.
Financial Stability Deputy Governor Sarah Breeden, who joined the committee in 2023, diverged from Bailey's position for the first time, supporting a rate cut.
She stated that "the upside risks to inflation have weakened," while the downside risks to demand "have become more pronounced." Market Deputy Governor Dave Ramsden, along with external members Alan Taylor and Swati Dhingra, are other dovish members supporting a rate cut.
Shift in Inflation Expectations
The Bank of England noted in its monetary policy report that "the risks of greater inflation persistence have become less apparent, and the risks to medium-term inflation from weak demand are more significant, making the overall risks more balanced." The Bank of England stated that the inflation rate of 3.8% in September "may be the peak."
The latest forecasts indicate that the inflation rate will drop to 3.1% early next year and stabilize around the 2% target starting in the second quarter of 2027. The unemployment rate is expected to peak at 5.1% in the second quarter, higher than the August forecast of 4.9%.
The Bank of England raised its economic growth forecast for this year from 1.25% to 1.5%, keeping the forecasts for 2026 and 2027 unchanged.
Fiscal Policy in Limbo
This decision comes just weeks before Chancellor of the Exchequer Rachel Reeves is set to announce the budget, with the market expecting her to announce large-scale tax increases that could impact economic growth and suppress inflation The Bank of England's forecasts and policy decisions are based on the fiscal setting from March, without incorporating the anticipated budget measures.
Currently, the 4% interest rate level in the UK is tied for the highest among the G7 countries, alongside the United States, but the market expects the Federal Reserve to cut rates more quickly. Reeves stated this week that the current interest rate level "restricts corporate borrowing and burdens household finances."
Bailey stated in a written statement: "We still believe that interest rates are on a gradual downward path, but before we cut rates again, we need to ensure that inflation is moving back towards the 2% target."
