The Bank of England’s rate-setting committee is heading for one of its most finely balanced decisions in years, as policymakers weigh easing inflation pressures against the risks of slower growth from looming tax rises.
The Monetary Policy Committee (MPC) will meet next Thursday to decide whether to lower the base interest rate by 0.25 percentage points to 3.75 per cent — which would mark the Bank’s sixth rate cut since August 2024 and its lowest level in nearly three years.
Markets have shifted sharply in recent weeks. Investors who once expected no move until mid-2025 now see a strong possibility of an immediate cut, aligning the Bank of England with the US Federal Reserve, which has eased policy for two consecutive meetings.
The case for a rate cut has been strengthened by softer economic data. Headline inflation remains above target at 3.8 per cent but has undershot the Bank’s forecasts for three straight months. Services inflation — a key measure of domestic price pressures — dropped to 4.7 per cent in September, below the MPC’s 5 per cent estimate. Meanwhile, food inflation eased to 4.5 per cent, and private-sector wage growth slowed to 4.4 per cent.
Unemployment has climbed to a four-year high of 4.8 per cent, suggesting cooling demand in the labour market. Government bond yields have also fallen to their lowest levels this year as traders anticipate further monetary easing.
“Concerns about entrenched inflation have given way to worries over an overly restrictive policy stance as the economy softens,” analysts at BNP Paribas said.
However, economists remain divided on whether the MPC will act immediately. Goldman Sachs and Nomura expect a narrow vote in favour of a cut, while Deutsche Bank predicts a hold. Sanjay Raja, Deutsche’s chief UK economist, said the committee might prefer to wait until after Chancellor Rachel Reeves delivers her budget later this month, which is expected to include up to £40 billion in tax rises.
Analysts warn that higher taxes could slow growth and bolster the case for cuts later in the year. “The MPC is finely balanced,” Raja said. “Fiscal tightening could be the trigger for action in December rather than November.”
The Bank will also publish updated forecasts for inflation, growth, and unemployment next week. These will be closely scrutinised amid reports that the Office for Budget Responsibility plans to downgrade productivity projections, potentially leaving a £20 billion gap in government finances.
Pantheon Macroeconomics said a sharp rise in income taxes could “tip the Bank towards cutting in December and again in spring” as economic pressures mount.
Next week’s decision will be closely watched across global markets. Whether the Bank opts to mirror the US Federal Reserve’s policy easing or hold steady pending fiscal clarity, the outcome will shape the direction of British monetary policy well into 2025.
