The Bank of England kept interest rates unchanged as scheduled, removing cautious wording to pave the way for a rate cut in December.

The Bank of England voted to maintain the interest rate at 4% by a narrow margin, laying the foundation for a rate cut in December. Five members of the Bank of England's Monetary Policy Committee voted to keep the policy unchanged, with Governor Bailey's vote playing a key role; four members called for a 25 basis point rate cut to 3.75%, making the vote more dovish than expected. The Bank of England stated that the September inflation rate of 3.8% was "likely to be the peak". Among all officials who voted to maintain the interest rate, Bailey was the most dovish, gradually leaning towards supporting a rate cut, as he believed that the risks of inflation had "recently decreased and tended to balance out". In a written statement, he said, "We still believe that the interest rate is gradually decreasing, but we need to ensure that the inflation rate can return to our target level of 2% before cutting rates again." This decision marked the Bank of England breaking the pace of gradually easing monetary policy every quarter since August 2024. Bailey stated in a press conference that there still existed risks of inflation that "may be difficult to reverse". However, the Bank of England is also preparing for actions in December, when the Monetary Policy Committee will have a clearer understanding of the economic situation, as well as the key Autumn Budget to be announced later this month by the UK Labour government and two additional rounds of inflation and employment data. Although the market had anticipated this decision, the Bank of England revised its guidance, stating that the interest rate "may continue to gradually decline", with the word "cautious" being removed. The pound to dollar exchange rate retraced its early gains after the decision was announced, trading near 1.3075, as traders increased their bets on further monetary easing policies in the coming months. They anticipate a cut of about 50 basis points by mid-2026, compared to the expectation of 47 basis points before the decision was announced. This boosted UK bond prices, with the 2-year bond yield falling by 2 basis points to 3.78%. Yael Selfin, Chief Economist at KPMG UK, said, "The voting results were very close, and the tone of the minutes was more dovish, indicating that the possibility of a rate cut in December still exists. The data over the past few months has been positive, with inflation lower than the Bank of England's expectations, and the labor market remaining loose." In a comprehensive reform of communication, the Bank of England's Monetary Policy Committee (MPC) publicly disclosed the individual views of its members for the first time. Bailey stated, "Inflationary risks have eased since August, so I chose to maintain the interest rate unchanged to await more evidence." He added that his stance reflected a "forward-looking Taylor rule" interest rate path, which the Bank's documents show would mean three further rate cuts in the next year. Alongside Bailey, also supporting the decision to maintain the interest rate were Deputy Governor Clare Lombardelli, Chief Economist Huw Pill, and external members Catherine Mann and Megan Greene. However, Deputy Governor Sarah Breedon, responsible for financial stability since joining the committee in 2023, disagreed with Bailey's opinion for the first time and leaned towards a rate cut. She stated, "Inflationary risks have diminished, while the risks of demand weakening have become more prominent." The decision ended a streak of five consecutive quarters of rate cuts since August last year, as the committee sought to strike a balance between stubborn inflation and recent soft wage and unemployment data. The Monetary Policy Report published alongside the decision stated, "The risks posed by the persistence of a strengthened inflation no longer seem apparent, while the risks of weak demand leading to medium-term inflation risks are more prominent, thus overall, risks are more balanced." The rate decision comes just weeks before UK Chancellor Rachel Reeves announces the budget, with expectations of significant tax increases that could dampen economic growth and curb inflation. The Bank of England's forecasts and policy decisions are based on fiscal policy effective from March and do not encompass any anticipated new budgetary measures. Based on these assumptions, the Bank of England's updated forecasts show that inflation will fall to 3.1% at the beginning of next year and stabilize near the 2% target level from the second quarter of 2027 onwards; the unemployment rate is expected to peak at 5.1% in the second quarter, higher than the 4.9% forecast in August. The Bank raised its economic growth forecast for this year from 1.25% to 1.5%, and maintained the forecasts for economic growth in 2026 and 2027 unchanged. The UK interest rate is currently at 4%, the highest level among the G7 countries alongside the US, but the Federal Reserve is expected to lower rates more quickly. Reeves stated this week that the current rate level "limits business borrowing and adds to household financial burdens".