The Bank of England has kept interest rates unchanged at 4%, despite ongoing concerns about stubbornly high inflation. Policymakers voted 7-2 to hold borrowing costs, with Swati Dhingra and Alan Taylor the only members calling for a 0.25 percentage point cut.
Governor Andrew Bailey warned that although inflation is expected to return to the Bank’s 2% target, the UK is “not out of the woods yet”. He said any future rate cuts would need to be made “gradually and carefully” to avoid fuelling further price pressures.
The decision comes as businesses report growing anxiety over the potential impact of tax rises in Chancellor Rachel Reeves’ upcoming autumn Budget. A Bank survey found “consumer caution” is a “key theme”, with some firms “now worrying about potential impacts on confidence” from the fiscal plans.
Reeves faces the challenge of finding between £20bn and £50bn in either tax increases or spending cuts to maintain her fiscal strategy. The Bank’s move to slow the pace of its quantitative tightening programme, from £100bn to £70bn a year, could provide some relief by easing pressure on government borrowing costs.
However, the central bank warned that inflation remains a “source of discomfort”, with concerns that the recent rise could feed into wages and the broader price-setting process. Policymakers remain focused on “squeezing out any existing or emerging persistent inflationary pressures” to return inflation to target.
The Bank’s cautious approach suggests further rate cuts are unlikely to materialise this year, with traders now betting the next reduction may not come until as late as April 2026. Economists warn the MPC faces a “tricky” decision in November, just before Reeves unveils her fiscal plans.
