Bank of England: Rates on hold as expected with rate cut likely in December

In line with consensus, the Bank of England (BoE) kept rates on hold at 4.00%. This was another close decision, but the bank looks on track to cut in December or, failing that, in February as more evidence is likely to emerge that inflation is on a downward path following the Autumn Budget.

Many had been suggesting this could be a relatively close call, and it was. Four of the nine Monetary Policy Committee (MPC) members voted for a cut (Sarah Breeden, Swati Dhingra, Dave Ramsden and Alan Taylor). Within the group of those voting to keep rates on hold, four “placed greater weight on the risk of persistence in inflation” and Governor Andrew Bailey effectively emerged as the swing voter within this group, judging that “the overall risks to medium-term inflation had moved down to become more balanced recently. But there was value in waiting for further evidence”.

This decision was accompanied by some significant changes in BoE communications including individual member paragraphs for the first time. Governor Bailey’s paragraph said as follows: “I see further policy easing to come if disinflation becomes more clearly established in the period ahead. Recent evidence points to building slack in the economy, and the latest CPI [Consumer Prices Index] data were promising. But this is just one month of data… Rather than cutting bank rate now, I would prefer to wait and see if the durability in disinflation is confirmed in upcoming economic developments this year”. He pointed out in the press conference that, leading up to the BoE’s December meeting, the bank will get more data to help assess the outlook (it will have two more CPI prints by then for example) and it will also have the Autumn Budget to assess.

Close decisions may be here for a little while longer. According to the minutes “there was broad agreement… that as bank rate approached neutral, the contribution of monetary policy to underlying disinflation would become harder to discern, making the case for further policy easing more finely balanced”. The bank put the range for neutral between 2-4%. Part of its second key policy judgement is that “a gradual approach allows the MPC to assess carefully the balance of risks to inflation as the evidence evolves. As bank rate falls, how much further to lower it will inevitably become a closer call”.

The summary language around the decision was a touch more dovish than I would have expected, especially in light of an on hold decision.

The summary language around the decision was a touch more dovish than I would have expected, especially in light of an on hold decision. First, rather than again emphasise upside risk around inflation persistence, “the risk from greater inflation persistence has become less pronounced recently, and the risk to medium-term inflation from weaker demand more apparent, such that overall, the risks are now more balanced. But more evidence is needed on both”.  Second, the summary “guidance” language also changed a bit from “the committee judged that a gradual and careful approach to the further withdrawal of monetary policy restraint remained appropriate” to “if progress on disinflation continued, bank rate was likely to continue on a gradual downward path” (my italics in both cases).

In the bank’s central projection (which was de-emphasised in the communication – it is no longer as prominent in the Monetary Policy Report), inflation comes gradually back to target over the two-year horizon, conditioned on a “market” profile for rates where rates fall to 3.5% by the second half of next year. That is a little less rate cutting than is consensus among economists for the UK. However, the BoE forecasts are also conditioned on existing fiscal policy, but the Autumn Budget in late November is widely expected to be contractionary (and so potentially justifying more rate cuts). More generally, as you’d expect, the Governor was firm in saying that the bank has not based decision making on any expectation of what will be in the Autumn Budget and that the bank has conditioned its forecasts on existing fiscal policy from March.

That said, the point was made a few times in the press conference that inflation was quite a way above target at 3.8%. Plenty of time was also spent outlining the BoE’s two main alternative scenarios (monetary policy was described as set to balance these risks). One of the scenarios sees more inflation persistence (the other sees lower demand and inflation falling below target). Different MPC members placed different weights on the scenarios, but Catherine Mann, for example, in her paragraph, described the inflation persistence scenario as her central scenario.

I have been expecting the BoE to cut rates further even after a pause today. At this stage, a cut seems likely in December or February, with December looking more likely given the tone and content of the minutes and press conference, but with timing dependent on incoming data and events (see the Governor’s need for more evidence). Inflation and labour market data over the next couple of weeks and the Autumn Budget on 26 November will be the next obvious points for observers to revise views. Contractionary tax hikes are widely expected, and the Chancellor has indicated that there will be a focus on lowering inflation, but the details and timing of policy changes (as well as market reactions) will be important for the monetary policy outlook.

The fund manager view – Ben Nicholl, Senior Fund Manager, Rates & Cash

At its meeting on Thursday, 6 November 2025, the Bank of England (BoE) voted to leave base interest rates unchanged at 4.0%, by a majority of 5-4, in what was a slightly closer call than the market had been anticipating. It has become quite evident of late that the Monetary Policy Committee (MPC) is split into two camps; those who believe that the disinflationary process remains on track to bring inflation back towards target and worry more about downside risks, and those that fear that inflation has become somewhat more entrenched within the economy and therefore may be relatively persistently high. Governor Andrew Bailey sits in the middle and has emerged as the swing voter.

At its August 2025 meeting, the BoE increased its forecast for peak Consumer Price Inflation (CPI) to 4.1% and noted that the upside risks around medium-term inflationary pressures had moved higher since the prior Monetary Policy Report (MPR) meeting in May 2025. But with the surprise downside miss to the September 2025 CPI data, where year-on-year CPI came in at 3.8% versus expectations of 4.0%, it would appear that those upside risks have reduced (at least for now). The view from Governor Bailey is that we have now moved past peak inflation, but with the caveat being, this was just one data print and inflation remains well above target.

With September’s inflation data surprising to the downside, markets had moved to re-price an additional cut in interest rates of 0.25% by the end of 2025. December seemed more likely than November heading into the meeting; before its meeting on 18 December 2025, the BoE will have more data available to assess the economic outlook, including two additional labour market reports and CPI data releases. The government will also have presented its Autumn Budget, which is due on Wednesday, 26 November.

Despite dropping the ‘gradual and careful’ approach in reducing the restrictiveness of monetary policy, the committee still judges that the path for interest rates remains on a downward trajectory.

Despite dropping the “gradual and careful” approach in reducing the restrictiveness of monetary policy, the committee still judges that the path for interest rates remains on a downward trajectory. The BoE, and Governor Bailey in particular, are however, very much data dependent. Should the economic data come in line, or surprise to the downside versus BoE expectations, then December 2025 is very much a live meeting. Markets currently have the probability of a 25 basis points cut in base interest rates in December at around 70%.

Gilts have performed well over the last few months, both outright and relative to their global peers; having hit 5.75% in early September 30-year gilt yields now sit at around 5.25%. The catalysts for this move have been widespread, with the macro (macro-economic data), micro (bond supply), and market sentiment, all shifting in favour of the gilt markets. September’s labour market and inflation reports have seen the market reprice a rate cut before the end of the 2025, resulting in yields on shorter maturity bonds being at or close to their lows for the year.

The UK Debt Management Office (DMO) has responded to changing market conditions by increasing their remit flexibility, while simultaneously slashing longer maturity debt issuance. The recent decision to cancel a long 30-year maturity gilt auction was well timed and injected much need confidence into a fragile market, signalling to investors that the DMO was going to stick to its issuance targets, and that issuing longer maturity gilts at elevated yields was sub optimal for the taxpayer.

And last, but by no means least, recent headlines around potential fiscal policy at the Autumn Budget have been positive for gilts: in contrast to the Budget of October 2024, there now appears to be a recognition, from the Chancellor at least, of the issues that have been plaguing the UK gilt market for the last 12 months. The near-term fate of the gilt market is now very much in the hands of Chancellor Rachel Reeves; if she can stick to the fiscal rules, cover the fiscal black hole credibly, show that debt is on a sustainable downward trajectory, and enact policies that bring down inflation, then gilts could have a strong finish to the year.

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