The Bank of England, with interest rates at 4%, suspended its monetary easing cycle as Governor Andrew Bailey warned that Britain has “not yet out of the woods” in terms of inflation.
The bank’s nine-member Monetary Policy Committee (MPC) decision was made, with seven members voting unchanged while two members cut a quarter of the cent. The results are consistent with market expectations, with investors placing bets and interest rates will remain 4% for the rest of 2025.
In addition to interest rate decisions, the central bank announced it would slow down government bond sales. Over the next 12 months, it will shrink its balance sheet by mixing gilded sales and maturity, down from £100 billion last year. The bank said the move “is aimed at minimizing the impact on the gilding market conditions” after UK long-term debt yields soared to nearly three decades.
Bailey said the decision to adjust the speed of bond disposal is a decision to “better reflect demand conditions.” Bond yields are inversely proportional to prices, and the market is nervous about the large supply of gold plating after the record issuance in September this year.
The suspension was confirmed this week by the Office of the National Bureau of Statistics (ONS) (ONS) that inflation in August was steady at 3.8%, the highest level since early 2024 and was almost the bank’s target of 2%. Service inflation is a key measure of domestic price pressure, rising to 5%.
Food prices and higher employment costs associated with Prime Minister Rachel Reeves’ £25 billion business attack were cited by banks for a business attack that drove higher inflation in September, which is expected to receive a 4% read.
Despite cutting tax rates five times since August 2024, the bank stressed that “monetary policy is not on the preset path” and promised a “gradual, cautious” approach to further reductions.
“While inflation is expected to drop in the coming years, we have not left the woods yet, so any future cuts will need to be made step by step and careful,” Bailey added.
In recent months, the UK’s economy has had little momentum. According to ONS, GDP paralleled in July, while unemployment rose to a four-year high of 4.7%. The bank also warned that geopolitical risks, including trade tariffs by Donald Trump and wars in Ukraine and Gaza, could further impact the global economy.
The MPC statement said economic growth was “still exhausted”, highlighting concerns that businesses demanding higher wages and higher prices may maintain inflation.
Two members who voted to lay off employees – Swati Dhingra and Alan Taylor, both of the outside members, believed that the risk of recession must be reduced.
The market responded calmly to the decision. The yield on gold plating in 10 years is 4.62%, while the yield on gold plating in 30 years reduces 1 basis point to 5.42%. Sterling briefly rose against the dollar but ended at $1.369, while the euro traded at 86.72p. The mid-speed of FTSE 100 and Chinese stock 250 climbed about 0.3%.
The bank’s next move will largely depend on inflation data entering Prime Minister Reeves’ Nov. 26 budget, which is expected to include up to £40 billion in tax increases and spending cuts.
