The Economist, among others, is reporting that the Bank of England will vote to hold interest rates unchanged in its meeting on Thursday. Yet they hope to see change happen. Inflation is still more than a percentage point over the government’s official target of around 2%. This has made for a particularly complicated backdrop for UK monetary policy.
The effective bank rate has recently soared to 5.25%. That would be an increase from just 0.1% – the level at the beginning of January 2021. This new rate has a significant ripple effect through the housing sector, especially affecting homeowners, especially those looking for new fixed-rate mortgages. With the core inflation rate still at 3.8% as of August, inflation is still running too hot. The Fed’s target is 2%. Such conditions have created pressures on the administration to push for lower interest rates to buoy economic growth.
Given recent moves from other central banks, the Bank of England has come under greater scrutiny. The Federal Reserve, America’s central bank, has already lowered its interest rates to a range of 4% to 4.25%. This reduction is the biggest cut we’ve witnessed in more than two years. Most analysts anticipate that the US will not cut interest rates any more in 2023. They predict no change in rates through the end of 2023. In the like manner, the European Central Bank decided to hold its main interest rate at 2% last Thursday.
The Bank of England has methodically raised its policy rate by 440 basis points in the last two years. It peaked at 5.25% in August 2023, dropping to 5% in August 2024. After a long string of cuts, the rate fell to 4.75% in November. It continued to go down to 4.5% in February 2025, and eventually to 4.0% on August 7, 2025.
The uncertainty caused by the up-coming budget makes an already difficult decision-making process for the Bank even more complicated. The uncertainty surrounding inflation forecasts and their implications for economic health could play a pivotal role in shaping future monetary policy.
“Many will be waiting with bated breath for the Budget. This waiting game, alongside forecasts for inflation to remain above target, makes it less likely for the Bank of England to make further rate cuts this year.”
The anticipation surrounding the forthcoming budget adds an additional layer of complexity to the Bank’s decision-making process. The uncertainty surrounding inflation forecasts and their implications for economic health could play a pivotal role in shaping future monetary policy.