The Bank of England has held interest rates at 4 per cent, pausing its cycle of monetary easing as governor Andrew Bailey warned that Britain was “not out of the woods yet” on inflation.
The decision, taken by the Bank’s nine-member Monetary Policy Committee (MPC), saw seven members vote to leave rates unchanged while two backed a quarter-point cut. The outcome was in line with market expectations, with investors betting that rates will remain at 4 per cent for the rest of 2025.
Alongside the rate decision, the central bank announced that it would slow the pace of government bond sales. Over the next 12 months, it will shrink its balance sheet by £70 billion — down from £100 billion last year — through a mix of gilt sales and maturities. The Bank said the move was designed “to minimise the impact on gilt market conditions” after long-term UK debt yields surged to their highest level in nearly three decades.
Bailey said the decision to adjust the pace of bond disposals was made “to better reflect demand conditions”. Bond yields and prices move inversely, and markets had been nervous about heavy gilt supply following record issuance this September.
The pause comes after the Office for National Statistics (ONS) confirmed this week that inflation held steady at 3.8 per cent in August, the highest level since early 2024 and nearly double the Bank’s 2 per cent target. Services inflation, a key measure of domestic price pressures, rose to 5 per cent.
Food prices and higher employment costs linked to Chancellor Rachel Reeves’s £25 billion national insurance raid on businesses were cited by the Bank as likely to push inflation higher in September, forecasting a 4 per cent reading.
Despite five rate cuts since August 2024, the Bank stressed that “monetary policy is not on a pre-set path” and promised a “gradual and careful” approach to any further reductions.
Bailey added: “While inflation is expected to decline in the coming years, we’re not out of the woods yet, so any future cuts will need to be made gradually and carefully.”
Britain’s economy has shown little momentum in recent months. GDP flatlined in July, according to the ONS, while unemployment climbed to a four-year high of 4.7 per cent. The Bank also warned that geopolitical risks — including Donald Trump’s trade tariffs and the wars in Ukraine and Gaza — could weigh further on the global economy.
Economic growth “remained subdued,” the MPC statement said, highlighting concerns that workers demanding higher pay and firms raising prices could keep inflation sticky.
The two members who voted for a cut — Swati Dhingra and Alan Taylor, both external members — argued that a reduction was necessary to offset growing recession risks.
Markets reacted calmly to the decision. The yield on 10-year gilts held at 4.62 per cent, while the 30-year gilt yield slipped 1 basis point to 5.42 per cent. Sterling rose briefly against the dollar but ended flat at $1.369, while the euro traded at 86.72p. The FTSE 100 and mid-cap FTSE 250 both climbed around 0.3 per cent.
The Bank’s next move will depend heavily on inflation data heading into Chancellor Reeves’s November 26 budget, which is expected to include up to £40 billion in tax rises and spending cuts.
Read more:
Bank of England holds UK interest rates at 4% amid inflation fears