Inflation Eases, Pressure Mounts: Bank of England Eyes December Rate Cut

The Bank of England decided to keep interest rates unchanged on Thursday, but a close vote and hints that Governor Andrew Bailey may soon support a rate cut have increased expectations of a possible move in December, following the government’s budget later this month.

The Monetary Policy Committee (MPC), consisting of nine members, voted 5–4 to maintain the Bank Rate at 4.0%, with Bailey among those preferring to hold rates steady. However, he was the only one of the five who believed that inflation risks had eased, saying the outlook was at a “critical moment” and that it was worth waiting for more economic data before taking further action.

Most economists surveyed by Reuters had anticipated a wider 6–3 vote to keep rates unchanged. The MPC noted that the risk of weak demand in the economy had increased, while the threat of persistently high inflation had diminished.

Following the announcement, the pound briefly dipped before recovering, and short-term government bond yields fell slightly. The MPC’s next policy decision is scheduled for December 18. Economists, including KPMG’s Yael Selfin and Deutsche Bank’s Sanjay Raja, expect the BoE to begin cutting rates next month, with forecasts suggesting the rate could fall to 3.25% by summer 2025 if data supports further easing.

The Bank of England stated that inflation in the UK, currently at 3.8%—the highest among G7 nations—has likely peaked and should decline in the coming months due to slower growth and a weakening labour market. Bailey reaffirmed that rates would only be cut further once there is clear evidence that inflation is on track to reach the 2% target.

Thursday’s decision marked the first pause in the BoE’s gradual rate-cutting cycle that began in August 2024. The Bank’s projections show inflation staying above target until mid-2027, though slightly lower than previously expected, and warned that economic growth may be held back by weak household spending.

In a shift to its policy guidance, the MPC replaced its earlier statement about taking a “gradual and careful approach” to rate cuts with a new line indicating that if progress on lowering inflation continues, the Bank Rate is “likely to continue on a gradual downward path.”

While markets had largely expected no change this time, the narrow vote and Bailey’s potential shift toward supporting a cut strengthened bets for December. Investors now see about a 55% chance of a rate reduction, depending on upcoming inflation and labour data and the fiscal impact of Chancellor Rachel Reeves’ expected tax increases in the November 26 budget.

The BoE also introduced new transparency measures, publishing individual MPC member summaries for the first time. The central bank slightly upgraded its 2025 growth forecast to 1.5%, while keeping its 2026 outlook nearly unchanged at 1.2%.