The Bank of England’s decision to keep interest rates at 4% reflects a careful balancing act by Governor Andrew Bailey, who is keen to protect the institution’s reputation while navigating complex economic indicators. This important decision came out of a dividing vote. It comes as inflation continues to struggle to get under control and the economy is showing indicators of a slowing economy.
Bailey’s decision was shaped by three big factors, which he believed were crucial to establishing before changing interest rates. Any cut in rates this month would more likely be a politically motivated move. It would no doubt cheer Labour’s Rachel Reeves ahead of her own budget statement later this month. Inflation has already reached the highest level since 2008 —3.8% — and is expected to reach 4% in August. Against this backdrop, Bailey emphasized the importance of doing what is credible as financial conditions continue to change.
The second factor shaping that decision was an eagerness to wait. They were interested in understanding how soon-to-be-announced budgetary policies would shift the central bank’s inflation-fighting calculus. Bailey acknowledged that this prudent approach allows us to better understand how fiscal policies can impact inflation. It also illuminates their effects on economic growth. He stated, “that inflation is on track to return to our 2% target,” underscoring the Bank’s commitment to its long-term goals.
Economic forecasts are for that growth to slow to 1.2% next year. They’re counting on a slow recovery beginning in 2027. Beyond that, a gradual recovery is expected, which will invariably bring stronger tax collections and create a cleaner fiscal picture. The Bank’s projection assumes that inflation declines gradually to target over the next several years.
Beyond all of these considerations, Bailey is looking at the overall economic climate. Even the Bank’s rosy forecasts leave a lot of trouble ahead. There are indeed “sunny uplands ahead for Reeves,” thanks to optimistic economic growth expected to boost the state’s revenues from 1.5% this year to 1.8% in 2028. This rosy scenario is offered on the hope that doing nothing will prove good for the overall economy and public finances.
These factors contradict one another, and Bailey is weighing them all carefully. It appears any cuts coming to the rate should be expected to be delayed until December at the earliest. Allowing budget policy to play out leaves a calmer, more predictable background. This increased stability will be beneficial to support further actions on interest rates in the future.