The Bank of England is preparing for a finely poised vote on interest rates next Thursday, as policymakers weigh the benefits of lower inflation against the threat of weaker economic growth following upcoming tax rises.
Markets, which only weeks ago expected no change in rates until mid-2025, have now sharply shifted expectations. Investors are betting that the Monetary Policy Committee (MPC) — the Bank’s nine-member rate-setting panel — could vote narrowly in favour of a 0.25 percentage point cut, reducing the base rate to 3.75 per cent, the lowest level in nearly three years.
If approved, it would mark the Bank’s sixth cut since August 2024 and would mirror the US Federal Reserve’s recent decision to ease policy for the second consecutive meeting.
The possibility of an imminent rate reduction follows a run of softer economic data. Inflation, while still above target at 3.8 per cent, has remained below the Bank’s forecasts for three consecutive months. Services inflation — a key indicator of domestic pricing pressures — eased to 4.7 per cent in September, under the MPC’s 5 per cent forecast.
Food price growth has slowed to 4.5 per cent, while private sector wage growth has moderated to 4.4 per cent. Unemployment, meanwhile, has risen to a four-year high of 4.8 per cent, signalling slack in the labour market.
Yields on UK government bonds have fallen to their lowest levels this year as traders increasingly anticipate a rate cut before year-end. “Fears of entrenched inflationary pressures have given way to concerns about faster labour market cooling and overly restrictive monetary policy,” analysts at BNP Paribas noted.
Investment banks are split over whether the MPC will act this month or wait for clearer fiscal signals. Goldman Sachs and Nomura forecast a narrow vote in favour of a cut next Thursday, while Deutsche Bank believes the committee will err on the side of caution and hold rates steady.
Sanjay Raja, Deutsche Bank’s chief UK economist, said the MPC is “finely balanced” but may decide to delay action until after the chancellor’s budget. Rachel Reeves is expected to announce tax increases of up to £40 billion, a move analysts warn could dampen economic growth and strengthen the case for monetary easing later in the year.
Investec’s economists urged restraint, suggesting the MPC should “wait for another batch of inflation data” before acting. However, Goldman Sachs argued the Bank should move pre-emptively to offset the “contractionary impulse” expected from the forthcoming fiscal tightening.
Alongside next week’s rate decision, the Bank will release updated forecasts for growth, inflation, unemployment and productivity. These will be closely watched amid reports that the Office for Budget Responsibility plans to downgrade its own productivity outlook, potentially leaving a £20 billion hole in the chancellor’s fiscal plans.
Analysts at Pantheon Macroeconomics said that a significant income tax rise could “tip the [Bank] towards cutting in December and again in the spring” as the dual effects of higher taxes and slowing inflation take hold.
The finely balanced decision places the UK at a crossroads: whether to move in step with the US Federal Reserve’s easing cycle or to pause until the full impact of the budget becomes clear. Either way, next week’s vote will be one of the most closely watched in years — setting the tone for monetary policy well into 2025.
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Bank of England faces knife-edge decision on rate cut as inflation eases but growth risks mount
