Bank of England set to hold interest rates at 4%

The Bank of England is expected to keep interest rates on hold at 4 per cent again when its Monetary Policy Committee (MPC) meets on Thursday.

Economists say a cut remains highly unlikely, even with inflation coming in below the level expected last month.

Most experts believe the Bank will want to see clearer evidence that price pressures are fading before it makes its next move.

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At the last meeting in September, the MPC voted to keep the base rate unchanged at 4 per cent, following a modest 0.25 percentage point cut in August.

That August decision was unusually tight, requiring a second vote to reach a majority – the first time that has happened in the committee’s history.

With the Chancellor’s Budget just weeks away, the Bank is expected to err on the side of caution.

Paul Dales, chief UK economist at Capital Economics, told The i Paper: “There are two reasons why I doubt the Bank will cut interest rates. First, at 3.8 per cent, CPI [Consumer Prices Index] inflation is almost double the 2 per cent target, which makes it a risky time to cut interest rates. Second, it makes sense for the Bank to wait to see what’s in the Budget on 26 November.”

Others also expect a hold. Thomas Pugh, economist at RSM UK said: “We expect a 3-6 vote for a hold. But it throws the door wide open to a rate cut in December, especially if the budget is deflationary.”

Robert Wood of Pantheon Macroeconomics also expects a vote for a hold, by a 6-3 margin.

Inflation still too high for comfort

Although inflation has fallen sharply from the double-digit peaks of 2022, it remains well above target at 3.8 per cent.

Inflation is central to the Bank’s decision-making as when prices rise too quickly, the Bank raises interest rates to make borrowing more expensive and encourage saving, which reduces demand in the economy. That, in turn, should help to slow the pace of price increases.

Cutting rates too soon risks reigniting inflation, something policymakers are keen to avoid.

Dales said a rate cut in December was possible but not yet likely, adding: “That does make a rate cut at the following policy meeting in December more likely. But even then, I think inflation will still be uncomfortably high.

“As a result, our forecast is that the next rate cut takes place at the policy meeting in February next year.”

Budget caution dominates

The proximity of the Budget is another major reason the Bank is likely to stay put.

Any fiscal loosening from Rachel Reeves, such as tax cuts or spending pledges, could push prices higher, forcing the Bank to keep rates elevated for longer.

Stephen Barber, professor of global affairs at the University of East London, said the MPC is unlikely to make a move so close to the Budget.

He explained: “Quite what the Chancellor will do is still a matter of intense speculation and has the potential to be inflationary as well as put further pressure on the UK borrowing rate.”

He added that December would be a “better opportunity” for a rate cut if inflation continues to cool and the Budget turns out to be fiscally neutral.

Pantheon Macroeconomics expects a 6-3 vote to hold, slightly narrower than the 7-2 split in September. That suggests some members could soon lean towards easing, though not just yet.

What a rate hold means for mortgages

For millions of homeowners, the Bank’s decision will feed through to mortgage rates, though not always immediately.

Around four in five mortgage holders are on fixed-rate deals, meaning their monthly repayments would not change until their current term ends.

Still, the base rate has a strong influence on new fixed-rate products, as lenders price them based on where markets expect interest rates to head in the future.

Recently, optimism that inflation may have peaked has prompted several major banks, including Santander, NatWest and TSB, to trim mortgage rates. Barclays and HSBC have followed suit with reductions across selected products ahead of the Budget.

David Hollingworth, associate director of L&C Mortgages, said this latest round of cuts may reflect growing confidence that inflation is finally cooling.

He said: “This latest round of mortgage cuts may have been in response to inflation sticking at 3.8 per cent rather than increasing to 4 per cent as had been expected.”

That, he added, has “opened the door to a reduction in the base rate before the end of the year”, although such a move remains unlikely in November.

According to Moneyfacts, the average two-year fixed mortgage rate is currently 4.96 per cent, while five-year deals average 5.01 per cent.

While that’s lower than the peaks seen over the summer, borrowing costs remain far higher than before the recent rate-increasing cycle began.

Those on tracker and variable deals will see no change to their rates if interest rates are held.

Savings rates remain under pressure

The story for savers is more complex. Following the August cut, many banks and building societies trimmed easy-access rates, and even the best-paying accounts now lag behind inflation. In real terms, savers’ cash continues to lose value.

According to MoneySavingExpert, Zopa currently offers the top easy-access rate at 4.75 per cent – comprising a 3.25 per cent variable rate and a 1.5 per cent 12-month fixed bonus, tied to its Biscuit current account. Customers must pay in £500 a month to qualify.

Ulster Bank, part of NatWest, pays 4.5 per cent on balances over £5,000, while Chase offers the same rate for new customers with no minimum deposit. However, these headline rates often include time-limited bonuses that drop after a year, reducing returns unless the Bank cuts rates more decisively in future.

Robert Salter of accountancy firm Blick Rothenberg warned that falling savings rates could deepen the UK’s already low saving culture.

He said: “Any reduction in the interest rates paid to savers risks simply reinforcing the message that ‘saving doesn’t pay’.”