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 in favor to reduce the separate benchmark “Bank Rate” by 25 basis points. The September decision to hold rates was widely expected, after 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.
People walk along Bank Junction next to the Bank of England in the City of London, the capital’s financial district.
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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%.
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.
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.
The central move also moved to slow down the pace at which it is offloading U.K. government bonds — known as quantitative tightening — from £100 billion ($136.2 billion) over the past 12 months to £70 billion over the next year.
The process of reducing the amount of gilts held by the central bank leads to a tightening of monetary policy. Private bond investors typically replace the BOE when the central bank off loads gilts, reducing the amount of cash in the economy.
The central bank said the vast majority of the bonds will be redeemed, with £21 billion worth of bonds sold. The BOE has come under increased political scrutiny over its asset sale program, as any losses it incurs in the process are underwritten by the U.K. government.
In March, the U.K. government spending watchdog Office for Budget Responsibility estimated total losses from the asset sale program to amount to £104.2 billion.
No sudden moves
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.
U.K. Chancellor of the Exchequer Rachel Reeves leaves 10 Downing Street ahead of PMQs in the House of Commons in London, United Kingdom on June 11, 2025.
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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.Â
Deutsche Bank expects to see a slightly longer pause when it comes to the BOE’s next rate move. George Brown, senior economist at Schroders, cautioned Thursday that, while markets are betting on rate cuts resuming next year, “we remain doubtful this will materialise.”
— CNBC’s Ganesh Rao contributed to this story.
