Bank of England Holds Interest Rates at 4%, Future Cuts in 2025 Uncertain

Bank of England Maintains Interest Rates Amid Mixed Economic Signals

The Bank of England (BOE) decided on Thursday to keep the benchmark interest rate steady at 4%, reflecting ongoing concerns about inflationary pressures and an uncertain economic outlook. The Monetary Policy Committee (MPC) voted 7-2 in favor of holding rates, with two members advocating a 25 basis point cut.

This decision follows a 25 basis point reduction in August and aligns with expectations as the central bank balances persistent inflation against subdued growth and labor market dynamics.

Inflation Remains Above Target Despite Signs of Disinflation

The BOE reiterated its commitment to reducing inflation to its 2% target over the medium term. August’s consumer price index (CPI) remained unchanged at 3.8%, signaling sticky inflation. The central bank highlighted ongoing risks that temporary inflation increases could embed further wage and price rises.

Although wage growth has moderated and is forecasted to slow significantly, service-sector price inflation has remained broadly stable. The BOE forecasts inflation may peak at 4% in September before declining in early 2026.

Economic Growth and Labor Market Show Signs of Weakness

Growth data released before the MPC meeting indicated zero economic expansion in July, raising concerns about an emerging slowdown. The labor market is also cooling, with wage growth decelerating—factors that may alleviate inflation but also dampen economic momentum.

Quantitative Tightening Adjusted Amid Political and Fiscal Uncertainty

The BOE announced a slowdown in quantitative tightening, reducing gilt sales from £100 billion over the past year to £70 billion planned for the next 12 months. Most of the bonds will be redeemed directly, with £21 billion slated for outright sale. This reduction in asset sales aims to moderate monetary tightening effects.

The asset sale program has drawn political scrutiny due to potential losses, estimated by the Office for Budget Responsibility at £104.2 billion, which are ultimately backed by the UK government.

Awaiting Autumn Budget and Its Policy Implications

Market observers emphasize the complexity facing the BOE as it navigates inflation control without stifling a fragile economy. The upcoming Autumn Budget, expected on November 26 and led by Chancellor Rachel Reeves, is anticipated to introduce tax increases aimed at closing a significant fiscal deficit.

The BOE’s next policy meeting is scheduled for November 6, just before the budget announcement, underscoring the central bank’s cautious stance pending clearer fiscal signals.

Isaac Stell, investment manager at Wealth Club, noted, “Easing rates risks fueling inflation, while high rates strain the economy. The BOE is effectively waiting on fiscal policy decisions to avoid premature moves that could backfire.”

Economists remain skeptical about near-term rate cuts. Deutsche Bank’s Sanjay Raja highlighted that while inflation shows some moderation, it may yet rise before peaking. Schroders’ George Brown expressed doubt that market expectations for early 2026 rate reductions will materialize.