Bank of England to Cut Rates Amid Inflation Pressures

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LONDON, The Bank of England is expected to announce another interest rate cut on Thursday, marking the 3rd reduction within a year. However, persistent inflation concerns are likely to divide the Monetary Policy Committee (MPC) and complicate the outlook for further action.

Governor Andrew Bailey is expected to join most of the MPC in voting to reduce the Bank Rate from 4.25% to 4%, as Britain’s jobs market softens under pressure from higher employer taxes and an uncertain global economy. The move comes amid ongoing challenges for businesses facing squeezed margins and sluggish growth.

Yet, consensus within the Bank is far from certain. Two committee members are understood to favour a larger cut to bolster flagging economic activity, while two others are expected to push back, citing the risk of inflation remaining stubbornly above target, a pattern of division seen previously in May.

The Bank has so far adhered to a “gradual and careful” strategy, with rate cuts typically spaced three months apart. However, that steady pace is now in question.

Analysts at Pantheon Macroeconomics believe Thursday’s cut may be the last for some time, citing the persistent threat posed by elevated prices. Should that prove correct, it could undermine efforts by Prime Minister Keir Starmer and Chancellor Rachel Reeves to deliver on their pledges of higher growth plans already under scrutiny amid Labour’s expansive public spending proposals.

Investment bank Evercore, however, suggests further cuts may come quicker than expected if the labour market continues to weaken. Many investors now expect an additional cut in November, though projections beyond that remain cautious, with markets pricing in just one or two more reductions in 2026. Even with further easing, the Bank Rate would still stand above the euro zone’s 2% benchmark.

Inflation expectations remain elevated among UK households, limiting the Bank’s scope to stimulate the economy. Prices have exceeded the 2% target since May 2021, and the public remains wary.

Unlike the European Central Bank, which has cut rates eight times since June 2024 and expects inflation to stay below 2%, the Bank of England doesn’t forecast a return to target levels until early 2027. Stubborn wage growth, still hovering around 5%, continues to drive costs higher well above the 3% level the Bank views as compatible with price stability.

At 11:00 GMT on Thursday, the Bank will publish its latest interest rate decision and economic projections. Governor Bailey and other officials will follow up with a press conference at 11:30 GMT. Markets will also be watching closely for signals regarding the Bank’s ongoing quantitative tightening, as it continues to unwind its holdings of government bonds, a key concern for institutional investors.