BoE keeps rates on hold but signals cut as soon as next month

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 amid a weakening labour market and persistent inflation.

The Monetary Policy Committee voted by five to four on Thursday to keep borrowing costs steady, after cutting rates five times since the summer of 2024.

The MPC declared that inflation has now peaked in the UK and that further “gradual” rate reductions lie ahead.

The vote split “signals the bar for a cut in December isn’t high”, said Francesco Pesole, a FX strategist at ING.

“The assessment on inflation is also cautiously more dovish,” he added.

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 2 per cent by the fourth quarter of 2027.

It also 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.

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

Minutes to the meeting indicated that he is leaving the door open to another rate reduction as soon as December, depending on upcoming economic data and the content of chancellor Rachel Reeves’ November 26 Budget.

“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 per cent target before we cut them again,” Bailey said in a statement after the meeting.

The pound weakened slightly after the decision, before recovering to trade 0.4 per cent higher against the dollar at $1.310.

The market’s interest 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.

Reeves is hoping that fiscal discipline and efforts to bear down on costs will help pave the way for interest rate reductions in the months ahead.

“Today’s forecast shows that inflation is due to fall faster than previously predicted,” Reeves said on Thursday.

She added that the Budget, which is expected to increase taxes to cut government borrowing, would take the “fair choices?.?.?.?necessary to build the strong foundations for our economy”.

The BoE policymakers speaking to the media following the rate decision avoided saying anything substantive about the upcoming Budget.

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.

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

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”.

He said 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.

But rather than voting for a cut at present, he said he wanted to see if the “durability” of disinflation was confirmed in future “economic developments”, a reference to the next inflation and jobs market reports as well as Reeves’ Budget.

Gordon Shannon, a fund manager at TwentyFour Asset Management, said that the “inflation outlook very much allowed for a cut”.

But he added that rate-setters, “scarred from overpromising” on inflation proving to be transitory in 2021, want “at least a month’s more information” before making such a move.

The BoE next meets on December 18.