The Bank of England on Thursday decided to keep its benchmark interest rate unchanged at 4%, marking the first pause in its gradual rate-cutting cycle since August 2024.
The nine-member Monetary Policy Committee (MPC) voted 5-4 in favour of holding rates steady, with the narrow split underscoring the growing divergence among policymakers on how to balance the risks of persistent inflation against those of a slowing economy.
“Upside risks to inflation have become less pressing since August, and I see further policy easing to come if disinflation becomes more clearly established in the period ahead. Recent evidence points to building slack in the economy, and the latest CPI data were promising,” said Andrew Bailey, governor of Bank of England who voted to hold the bank rate.
The decision disappointed borrowers who had hoped for lower mortgage and loan costs but offered some relief to savers.
The British pound slipped to around $1.305 following the announcement, trimming earlier gains and hovering close to a seven-month low.
Policymakers divided over timing of next rate cut
Thursday’s decision marked a break from the Bank’s once-every-three-months pace of rate reductions that began in August 2024.
Four MPC members — Sarah Breeden, Swati Dhingra, Dave Ramsden and Alan Taylor — voted to cut the Bank Rate by 25 basis points to 3.75%, citing mounting downside risks to growth and consumption.
“These members attached a greater weight to downside risks, given that these would reflect a continuation of current trends, with particular concerns that household saving would remain elevated and weigh on consumption,” the bank said.
Dhingra and Taylor argued that monetary policy had already become “significantly over-restrictive” and risked damaging activity further.
“Rather than cutting Bank Rate now, I would prefer to wait and see if the durability of disinflation is confirmed in upcoming economic developments this year,” Bailey said.
Deputy Governor Sarah Breeden, one of the four dissenters, said the latest data gave her confidence that inflation was on track to fall further.
“I judge that a degree of slack has and will continue to open up in the labour market, which should continue to dampen pay growth,” said Sarah Breeden, deputy governor at the bank.
Inflation seen easing but staying above target until 2027
The Bank’s latest projections suggest inflation will remain above its 2% target until the second quarter of 2027, though slightly lower than previously forecast, at 1.9%.
The MPC noted that inflation persistence has become less of a concern, while the risks from weak demand and higher household savings have grown.
Recent consumer price data showed inflation holding steady at 3.8% in September, the highest among the Group of Seven advanced economies.
The Bank expects inflation to ease further in the coming months as economic activity softens and labour market slack increases.
The committee also pointed to the “encouraging progress” on disinflation, supported by slower pay growth, easing services inflation and weaker domestic demand.
Still, members agreed that more evidence was needed before resuming cuts to borrowing costs.
Analysts see December rate cut as base case amid fiscal tightening prospects
Money markets had priced in a one-in-three chance of a rate cut to 3.75% ahead of Thursday’s decision, reflecting expectations that the BoE would maintain its cautious path of policy easing.
The Bank reiterated that future rate moves would depend on incoming data.
“Holding rates today was the right decision, with inflation still nearly double the 2% target. The Bank will be in a stronger position after the dust settles from the budget, armed with additional jobs and inflation data, to judge whether further easing is warranted in December,” said George Brown, Senior Economist, Schroders, London.
Brown said that a cautious approach was still appropriate given the risk of high inflation becoming entrenched due to persistent wage growth and weak productivity.
He added that this stance could change if reports were accurate that the Chancellor planned to double her fiscal headroom to £20 billion ($26.84 billion) through fiscal tightening of around £40 billion.
Brown noted that if those measures, along with proposed tax cuts on household energy bills, were implemented, they could create room for the Bank to make multiple rate cuts next year.
“The BoE opted for a dovish hold. The MPC is not rushed and is waiting for the Treasury’s Autumn Statement, but the labour market is clearly softening and wage inflation is slowing faster than the Committee expected this summer,” said Mathieu Savary, chief strategist, BCA Research, Montreal.
“With fiscal tightening ahead, a December cut remains our base case. We stay overweight gilts.”
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