Market News

The Bank of England (BoE) faces one of its most finely balanced policy decisions in months this week, as signs of easing inflation and a cooling labour market fuel debate over whether to lower interest rates again.

Traders expect the Monetary Policy Committee (MPC) to hold interest rates at 4% on Thursday, according to market pricing, which implies a less than one-in-three chance of a quarter-point cut. The BoE has already reduced rates five times since last August as it seeks to bring inflation back to its 2% target while supporting faltering growth.

Some analysts, however, believe divisions among policymakers could produce another split vote, as unemployment edges higher and GDP growth remains sluggish. The prospect of a tightening fiscal stance in November’s budget has further strengthened arguments for a softer monetary policy stance.

“The Bank looks likely to keep rates on hold on 6 November, despite better inflation and wage news,” said James Smith, developed markets economist, UK at ING. “The committee is deeply divided, and we don’t expect clear signals on the Bank’s next steps. But assuming the autumn budget goes as expected, a December rate cut now looks more likely than not.”

The BoE's most recent quarter-point reduction, in August, passed only after two rounds of voting and a narrow 5-4 split. A similar outcome could hinge on whether BoE governor Andrew Bailey decides to back another cut rather than steady policy.

Headline inflation remains high at 3.8%, surpassing the 2.1% rate in the eurozone and the 3% rate in the US.

Kathleen Brooks, research director at XTB, said a surprise cut could not be ruled out given the run of weak data. “Inflation remains at 3.8%, still unacceptably high for the BoE, in our view. However, crucially, the BoE expected inflation to peak in September at 4%,” she said. “It will be interesting to see if the BoE downgrades its CPI forecast due to this, since inflation never reached its peak of 4%.”

Brooks added that if the BoE signalled inflation could reach the target before 2027, “this could give the green light for a rate cut in February”. Even a dovish tone without immediate action, she said, might have limited downside for sterling, “due to recent weakness in the pound and the sharp decline in UK gilt yields”.

Bailey said in September that the pace of rate cuts, which have been delivered roughly every three months since August 2024, was now “more uncertain”.

Simon French, chief economist at Panmure Gordon, said the MPC was likely to wait for chancellor Rachel Reeves’s budget on 26 November before taking further steps. “Inflation expectations amongst businesses and households remain elevated,” he said. “The option cost for the MPC of waiting to their December meeting — and a degree of fiscal clarity that will then be available — is low.”

French added that if fiscal discipline holds, the government could “translate its encouraging talk on controlling inflation into budget action” that paves the way for “up to 100bp of UK interest rate cuts in 2026, and a potential cyclical upswing”.

Analysts at Investec advised the committee to wait for another round of inflation data before taking action.

At the same time, Andrew Wishart, senior UK economist at Berenberg, expects a 6-3 vote to keep the Bank Rate unchanged. “The risk that robust nominal demand encourages companies to rebuild their profit margins by raising prices outweighs the downside surprise in wage growth in August and in CPI inflation in September, in our view,” Wishart said. “As current interest rates do not restrain aggregate demand significantly, we expect core inflation to remain sticky until early 2026.”

Markets are pricing a one-in-three chance of a rate cut this week, rising to two-in-three by year-end.

Several banks, including Goldman Sachs (GS) and Nomura, are predicting a narrow majority in favour of a quarter-point reduction to 3.75%, which would mark the BoE's sixth cut since last summer and bring borrowing costs to a near three-year low. The move would echo the US Federal Reserve’s quarter-point reduction earlier this week, its second consecutive cut.

“In a span of mere weeks, there has been a decisive shift in UK market narratives,” analysts at BNP Paribas said. “Fears of deeply entrenched domestic inflationary pressures have given way to concerns about faster-than-expected labour market cooling and overly restrictive monetary policy.”

Nomura economists added: “We expect the Bank of England to cut rates by 25bp at its 6 November meeting and to remove from its guidance any reference to interest rates being ‘restrictive'. We believe weaker data over the past month support a rate cut, but that there is probably only one voting configuration (5-4) that can deliver it.”

“The case for a quarter-point rate cut has strengthened materially on the back of a dovish round of data,” said Sanjay Raja, chief UK economist at Deutsche Bank.

However, he added: “We see a 6-2-1 vote tally to keep Bank Rate unchanged. Who’s voting for a rate cut? We think Dave Ramsden and Swati Dhingra will opt for a quarter-point rate cut. And we see Alan Taylor pushing for a larger half-point rate cut.”

In a note to clients, Goldman Sachs said they had changed their minds after the latest data amounted to a "convincing case for a cut [this] week".

Elsewhere, the European Central Bank held its benchmark rate at 2%, while the Federal Reserve lowered its range to 3.75–4%, but cautioned that another cut in December was “not a foregone conclusion”.

The BoE will also publish updated economic forecasts on Thursday, outlining its expectations for growth, inflation and unemployment in the months ahead.