Bank of England holds rates, further cut in 2025 hangs in the balance

The Bank of England voted to keep interest rates on hold on Thursday, as it weighs up sticky U.K. inflation with an uncertain growth outlook and jobs market.

The monetary policy committee (MPC) voted by 7-2 to keep rates steady at 4%, with two members of the MPS voting to reduce the separate benchmark “Bank Rate” by 25 basis points. The central bank last trimmed the key interest rate by 25 basis points in August.

“The Committee remains focused on squeezing out any existing or emerging persistent inflationary pressures, to return inflation sustainably to its 2% target in the medium term,” the BOE said in a statement.

Underlying disinflation has generally continued, the central bank noted. The British pound was broadly flat against the dollar following the announcement, at $1.3638.

While economists did not expect a September rate cut, they were eager to see the vote split and forward guidance from the central bank for clues on what the MPC might do at its next meeting in November.

“The prospect of a November cut hangs in the balance, and this meeting will be heavily scrutinised for hints on whether officials are still considering further easing this year,” economists at ING said in a note ahead of the decision.

The BOE reiterated that a “gradual and careful to the further withdrawal of monetary policy restraint remains appropriate.”

The latest MPC decision comes a day after U.K. inflation data showed there was no change in the rate of price rises in August, with the consumer price index remaining at 3.8%.

August core inflation, which excludes more volatile energy, food, alcohol and tobacco prices, climbed by an annual 3.6%, compared with 3.8% in the twelve months to July. The annual rate of services inflation slowed from 5% in July to 4.7% in August.

The BOE said Thursday that is “remains alert to the risk that this temporary increase in inflation could put additional upward pressure on the wage and price-setting process.”

Pay growth remains elevated, the bank noted, but has fallen and is expected to slow significantly over the rest of the year, while services consumer price inflation has been broadly flat over recent months.

“Upside risks around medium-term inflationary pressures remain prominent in the Committee’s assessment of the outlook,” it said.

The BOE has forecast that inflation could peak at 4% in September, double its 2% target, before retreating in the early half of 2026.

As it executed its previous interest rate cut in August, the central bank said it was mindful of inflationary pressures but aware of the need to promote growth and investment.

The latest monthly growth data showed there was zero growth in July, compared with the previous month, spurring concerns that a slowdown was setting in. The BOE is also mindful of a cooling jobs market and slowing wage growth, which will ease inflationary pressures and could fuel the argument for a further rate cut in coming months.

There’s also widespread uncertainty over the government’s Nov. 26 Autumn Budget, during which Finance Minister Rachel Reeves is likely to announce a raft of tax rises to eradicate a budget shortfall as she looks to balance the books and reduce borrowing. The BOE’s November meeting — penciled in on Nov.6 — comes just before the budget is announced.

“The BOE currently faces a dilemma, easing rates risks further fuelling inflation, but high rates strain an already weak economy. Add into the mix a government that is due to deliver a budget that needs to plug a black hole running into the tens of billions and the quandary becomes ever more complex,” Isaac Stell, investment manager at Wealth Club noted Thursday.

“For now, the real action may lie not with the Bank, but with Westminster. The BOE remains sat on the sidelines, waiting to see what tax and spending decisions emerge in the budget. Moves prior to this could backfire,” he added in emailed comments.

Economists say the BOE will want to see more evidence that services and core inflation are on a downward path before easing further.

“The good news is that August inflation data has corrected some of the upside surprise we saw last month. The bad news is that CPI has maybe a little further to go before hitting its peak,” Sanjay Raja, chief U.K. economist at Deutsche Bank, commented Wednesday. 

Raja noted that, while there were some encouraging bits of information in the latest inflation report, “we will need to see more of this for…