UK interest rates: BoE remains on pause as it awaits clarity

The Bank of England held interest rates steady at 4% today, ending a pattern of quarterly cuts that began in August 2024 – by Rob Morgan

A relatively benign September inflation print and some clear signals of a fiscally tight Budget from the Chancellor cast some doubt on a pause ahead of today’s vote. Yet policymakers still lack definitive data on the expected downward trajectory of inflation and the shape of the economy – as well as the details of a Budget that might yet contain some inflationary elements alongside demand-dampening tax rises.

What is the outlook from here?

With economic growth stagnating and cracks appearing in the jobs market it seems only a matter of time before the next interest rate cut arrives. Yet with inflation still close to double the Bank’s target rate, the BoE remains cautious about easing policy prematurely, effectively leaving the door open to an extended pause if data fails to justify a move.

Going forward, it’s likely that wage rises recede and a higher tax burden will keep demand in check, leading to a lower pace of price rises as we move into 2026. This will likely afford the BoE the opportunity to cut rates at least a couple of times over the next year, but in the meantime a majority of Threadneedle Street policymakers will probably remain reluctant to get too far ahead of incoming data.

That’s the economic backdrop as things stand, but the upcoming Budget introduces a wildcard into proceedings. The Chancellor has doubled down on her ambition to ease the rising cost of living, which implies she will be careful about which tax rises form part of her policy announcement mix. An income tax rise in particular would serve to quell demand, and with it some of the inflationary flames.

Will the BoE cut in December?

The timing of the next interest rate cut hinges on three key variables that members of the MPC will be weighing up: labor market data around pay settlements, inflation releases, and the precise content of the Budget on 26 November.

• Pay growth: While the labor market is showing cracks in terms of job openings, pay growth has remained relatively robust at 4.7% according to latest reading. This is inconsistent with a sustained return to the 2% inflation target, and although it’s widely expected to moderate it’s a key reason behind brisk household spending that is helping apply upward pressure to prices.
• Inflation: September’s softer-than-expected CPI print helped build the case for cutting rates sooner rather than later, but the trajectory remains far from clear cut. A majority of MPC members are likely to favour caution until inflation shows a more obvious retreat. There are two further inflation readings before the next meeting – covering October and November – which should paint a more definitive picture.

• Fiscal policy: With the Chancellor keen to bear down on rising prices to relieve pressure on households and lower the cost of government borrowing, she can be expected to favour non-inflationary fiscal moves that pave the way for interest rate cuts that subsequently stimulate growth. But some levers she could pull to raise revenue such as fuel duty or VAT could ratchet up the numbers.

Provided a combination of these variables point in the right direction a cut in December is on the table, but it may still be a finely balanced decision between the faction of the MPC unconvinced inflation is in marked retreat and those that see downside economic risks as the bigger threat.

What does it mean for cash savings?

The best interest rates on easy access accounts have been fairly stable in recent months as the consensus around the rough trajectory of BoE base rate has built. However, with inflation approaching the 4% mark there’s a significant risk that savers are earning returns that lag prevailing price rises, effectively losing them spending power and eroding financial resilience.

Fortunately, there are still some good, competitive rates available close to 4%, but it often means shopping around. Savers may also wish to consider fixed term accounts where rates are currently more generous than for easy access – provided the money isn’t required before the end of the term. If base rates are cut further in the coming months the return on a fixed rate account will be protected, whereas rates on easy access accounts have little chance of improving and could instead drop further. Presently a 12-month fix around the 4.3% level is achievable.

Rob Morgan is Chief Investment Analyst at Charles Stanley, part of Raymond James Wealth Management

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