Bank of England set to hold rates as inflation stays above target

The Bank of England is widely expected to hold its base interest rate at 4% at its policy meeting on Thursday, as officials weigh persistent inflation pressures against signs of cooling in the domestic economy and growing global uncertainty.

The base rate was cut to 4% in August after a string of reductions from a 2023 peak of 5.25%. Policymakers have signalled a cautious approach to further easing, with Governor Andrew Bailey saying cuts would be made gradually and carefully despite a general downward path. The decision to pause this week comes as inflation remains above the Bank’s 2% target while the jobs market and household spending show mixed signals.

The Monetary Policy Committee’s most recent cut in August was narrowly split, with a 5-4 vote in favour of a quarter-point reduction and an unprecedented second vote after one member pressed for a larger half-point cut. That close division underscores how finely balanced future decisions are likely to be. Some analysts still see scope for another cut before the end of the year, but such a move is not expected at this meeting.

Officials must balance headline inflation, wage growth and labour-market indicators. The Bank had expected inflation to peak at around 4% in September, which could give room for additional easing, but the outlook is complicated by other evidence. Annual growth in average regular pay excluding bonuses fell to 4.8% in the three months to July from 5.0% in the previous quarter, the slowest rate since May 2022. The wider economy has remained relatively flat and employment has softened, but inflation staying above target keeps pressure on the Bank to avoid easing too quickly.

Interest rate decisions carry direct implications for millions of households. Just under a third of households have a mortgage, and about 600,000 borrowers are on mortgages that track the Bank’s base rate and would see payments move more quickly with rate changes. The majority of mortgage holders remain on fixed-rate deals; while those customers do not see immediate payment changes, a large number of low-rate deals are due to roll off in coming years. Industry analysis shows about 800,000 fixed-rate mortgages with interest at 3% or below are expected to expire on average each year until the end of 2027, potentially exposing many borrowers to higher repayments.

Current borrowing costs for new deals remain significantly higher than in much of the past decade. As of 20 August, Moneyfacts reported an average two-year fixed mortgage rate of 4.98% and a five-year fixed rate of 5.00%, while two-year tracker rates averaged 4.67%. Savings rates have also moved with base-rate cuts; the average easy-access savings account rate is about 2.64%, and further reductions in the base rate would likely lead to lower returns for savers, affecting those who rely on interest income.

The Bank must also factor in international developments. Governor Bailey has warned that unpredictable US tariff policies and conflicts in Israel and Ukraine increase downside and upside risks to the inflation outlook. Global commodity and supply-chain pressures could feed into UK prices, complicating the case for further cuts.

Policymakers will also be watching the fiscal backdrop. Announcements in the government’s Budget on 26 November could alter the economic outlook and influence the Bank’s future decisions. For now, the committee’s stance reflects an attempt to thread a narrow path: supporting a gradual easing of borrowing costs while guarding against a renewed rise in inflation.

Markets and households will be looking for clues in the Bank’s statement and accompanying inflation and growth projections to see whether officials are becoming more confident about a sustained downward path for inflation or are still wary of external and domestic upside risks. The tight split in recent votes suggests any future moves will be made cautiously and could remain finely balanced through the year.