The Bank of England has kept interest rates on hold at 4% as it warned unemployment was rising and growth remained weak as Rachel Reeves prepares for her make-or-break budget.
With less than three weeks before the chancellor’s highly anticipated tax and spending measures, the Bank’s monetary policy committee (MPC) voted by a narrow five-four majority to keep borrowing costs unchanged for a second consecutive meeting.
However, the knife-edge decision and an updated forecast from the Bank that signalled inflation had probably peaked opened the door to a post-budget cut in rates as early as next month.
Holding the casting vote, Andrew Bailey, the Bank’s governor, said he wanted to “wait and see” whether inflationary pressures in the British economy would continue to fade and if Reeves’s budget would have an impact.
“We held interest rates at 4% 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% target before we cut them again,” he said.
Borrowing costs have been cut five times since Labour came to power in July 2024, easing pressure on households and businesses, with the last reduction made in August. Meanwhile, inflation is running at 3.8% – almost twice the Bank’s 2% target.
In her 26 November fiscal statement the chancellor is expected to increase taxes, potentially slowing the economy, alongside measures taking action against the rising cost of living.
Reeves welcomed the Bank’s updated forecasts showing inflation falling back at a faster than anticipated rate. “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,” she said.
Financial markets had expected the Bank to keep rates on hold. However, the close decision and updated gloomy forecasts for growth fuelled expectations for a December rate cut.
Bailey said the MPC would have an “opportunity to consider the budget” before its 18 December meeting.
Economists said tax increases could encourage the Bank to cut rates. “There is a plausible case for even weaker demand, hence pushing inflation lower from 2026,” said Janet Mui, the head of market analysis at the wealth manager RBC Brewin Dolphin.
“[We will] only get more clarity post budget, and governor Bailey’s vote will be crucial. Overall, markets believe the BoE has opened the door for a rate cut in December and has priced in that happening.”
Five members of the MPC voted to keep rates unchanged at 4%, including Bailey, while a minority of four pushed for a quarter-point reduction.
Expressing growing concern over the strength of the economy, the Bank said unemployment was poised to climb to a higher peak above 5% early next year – from 4.8% now – amid subdued hiring demand.
skip past newsletter promotion
Sign up to Business Today
Get set for the working day – we’ll point you to all the business news and analysis you need every morning
Privacy Notice: Newsletters may contain information about charities, online ads, and content funded by outside parties. If you do not have an account, we will create a guest account for you on theguardian.com to send you this newsletter. You can complete full registration at any time. For more information about how we use your data see our Privacy Policy. We use Google reCaptcha to protect our website and the Google Privacy Policy and Terms of Service apply.
after newsletter promotion
It said inflation was likely to have already peaked at 3.8%, below its previous prediction for a peak of 4% this autumn, and was set to fall back to about 2.5% next year before returning to its 2% target over the course of 2027.
Threadneedle Street warned that speculation over Reeves’s budget had probably contributed to weakness in the economy in recent months, and that households had kept a lid on spending amid heightened pressures on living costs.
It also found weaker exports to the US and disruption to Britain’s manufacturing base linked to the Jaguar Land Rover cyber-attack had pulled down output in the third quarter, forecasting a weaker growth rate of 0.2%.
However, policymakers signalled they remained concerned that inflationary pressures could continue to weigh on households and businesses.
While the MPC said it was a risk that current high rates of inflation could encourage workers and businesses to drive up their wage expectations and put up prices, the Bank said those risks were becoming tilted to the downside.
Signalling readiness to take action in the coming months, Bailey explained in the MPC minutes: “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.”
