Bank of England keeps rates on hold at 4% in knife-edge decision

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The Bank of England has kept its key interest rate unchanged at 4 per cent in a knife-edge decision but signalled a possible cut as soon as next month if wage growth and inflation continue to ease.

The BoE’s Monetary Policy Committee voted by five to four on Thursday to keep borrowing costs steady, after cutting rates five times since 2024. The MPC said UK inflation had now peaked, and that if progress continued, interest rates would “continue on a gradual downwards path”.

Andrew Bailey was among the rate-setters voting to keep policy unchanged, while the minority backed an immediate rate cut.

But minutes to the meeting suggested the BoE governor could change his stance in favour of a rate cut as soon as December, swinging the balance on the committee, depending on upcoming economic data and the content of chancellor Rachel Reeves’ Budget on November 26.

“Rather than cutting Bank Rate now, I would prefer to wait and see if the durability in disinflation is confirmed in upcoming economic developments this year,” Bailey said.

He added that market rate expectations, which point to rates levelling out at about 3.5 per cent next year following two more cuts, were a “fair description” of his current outlook.

The BoE’s latest economic projections forecast that inflation will drop from September’s rate of 3.8 per cent — almost twice its target — to just above 3 per cent early next year and to 2 per cent by the end of 2027. Although the near-term peak in inflation is lower than previously expected, the outlook for 2026 and 2027 is unchanged from the BoE’s August forecasts.

It predicted that GDP growth will slow from 1.5 per cent this year to 1.2 per cent in 2026, before picking up to 1.6 per cent in 2027 and 1.8 per cent in 2028.

The MPC vote split “signals the bar for a cut in December isn’t high”, said Francesco Pesole, an FX strategist at ING. “The assessment on inflation is also cautiously more dovish.”

The pound weakened slightly after the decision, before recovering to trade 0.3 per cent higher on the day at $1.308 against the dollar.

The market’s near-term rate expectations remained broadly unchanged, with traders putting a roughly two-thirds chance on a quarter-point rate cut coming at the next BoE meeting in December, according to levels implied by swaps contracts.

Four MPC members — deputy governors Sarah Breeden and Dave Ramsden, and external members Swati Dhingra and Alan Taylor — voted for a quarter-point cut to 3.75 per cent.

This group puts more weight on two key risks that could lead inflation to undershoot its target: the potential for a sharper rise in unemployment, given jobs growth is currently close to zero, and the caution on the part of consumers whose savings rate remains close to historic highs.

Bailey voted with deputy governor Clare Lombardelli, chief economist Huw Pill, and external MPC members Megan Greene and Catherine Mann to keep rates unchanged.

Most of this group puts more weight on the risk of higher inflation expectations and wage growth leading price pressures to persist, although Bailey himself said he believed the downside risks were stronger.

The BoE for the first time published individual statements giving each rate-setter’s policy outlook.

In his personal statement, Bailey said that he anticipated that the bank would cut rates if disinflation — a slowdown in the rate of inflation — “becomes more clearly established in the period ahead”.

Speaking to reporters, Bailey and fellow policymakers repeatedly avoided saying anything definitive on the Budget, stressing that their outlook was based on March fiscal forecasts and that they would take account of decisions announced on November 26 when they next meet in December. The BoE next announces rates on December 18.

Reeves said on Thursday that the Budget, in which she is expected to increase taxes to cut government borrowing, would take the “fair choices . . . necessary to build the strong foundations for our economy”.