The Bank of England kept rates unchanged as expected. Could there be three rate cuts over the next year?

At 20:00 on Thursday, the Bank of England maintained the benchmark interest rate at 4.00%, in line with market expectations, halting the quarterly rate-cutting rhythm that had been ongoing since August 2024. The committee sought to strike a balance between ‘stubborn inflation’ and recent softening trends in wage and unemployment data.

Following the announcement of the interest rate decision, the pound sterling fell by approximately 30 points against the US dollar in the short term before rebounding.

The voting results showed that five members voted to maintain the current interest rate, while four members supported a rate cut (compared to 7-2 in the previous meeting). The Bank of England narrowly maintained the interest rate at 4%, paving the way for a potential rate cut in December.

Bank of England Governor Andrew Bailey cast the decisive vote, while four members advocated for a 25-basis-point cut to 3.75%. The Bank of England stated that the 3.8% inflation rate in September “is likely to have already peaked.”

The minutes revealed that among the officials who voted to keep rates unchanged, Bailey was the most dovish, leaning towards supporting a rate cut as he believed that inflation risks “had recently declined and become more balanced.”

In a written statement, he remarked, “We still anticipate that interest rates will decline gradually, but before implementing another rate cut, we need to ensure that inflation is moving toward our 2% target.”

Although the market had anticipated this decision, the Bank of England revised its guidance, stating that interest rates “are likely to continue declining gradually,” while dropping the word ‘cautiously.’

This reform in the Bank of England’s communication framework allows each MPC member to explain the rationale behind their decisions. Bailey noted, “Since August, the upside risks to inflation are no longer as pressing,” and his choice to maintain rates was aimed at waiting for further evidence.

He added that his position reflects the interest rate path implied by the ‘forward-looking Taylor Rule,’ which, according to the central bank’s documents, suggests three rate cuts over the next year. Voting alongside Bailey were Deputy Governor for Monetary Policy Clare Lombardelli, Chief Economist Huw Pill, and external members Catherine Mann and Megan Greene.

Deputy Governor for Financial Stability Sarah Breeden, who joined the committee in 2023, dissented from Bailey for the first time, favoring a rate cut. She stated that ‘upside risks to inflation have diminished,’ while downside risks on the demand side ‘have become more prominent.’

Deputy Governor for Markets Dave Ramsden, along with external members Alan Taylor and Swati Dhingra, were other dovish members.

The Monetary Policy Report noted, ‘Risks associated with greater persistence of inflation have receded, while risks to medium-term inflation posed by weaker demand have become more pronounced, making the overall risks now more balanced.’

This interest rate decision comes weeks before Chancellor of the Exchequer Rachel Reeves is set to unveil the budget, in which she is expected to announce substantial tax increases that could dampen growth and suppress inflation. The Bank of England based its forecasts and policy decisions on the fiscal framework established in March and did not incorporate any anticipated budget measures.

Based on these assumptions, the Bank of England’s updated projections indicate that inflation will fall to 3.1% early next year and stabilize near the 2% target starting from the second quarter of 2027; unemployment is projected to peak at 5.1% in the second quarter, up from the 4.9% forecast in August. The bank revised its growth forecast for this year upward from 1.25% to 1.5%, maintaining its outlook for 2026 and 2027 unchanged.

At 4%, the UK’s interest rate is tied with the US for the highest level among G7 countries, but markets widely expect the Federal Reserve to ease policy more quickly. Reeves remarked earlier this week that the current interest rate level ‘is constraining business borrowing and adding pressure to household finances.’