The Bank of England has paused its cycle of interest rate cuts, voting to maintain the base rate at four per cent as inflationary pressures persist across the British economy.
The decision by the nine-member Monetary Policy Committee (MPC) comes after inflation stood at 3.8 per cent in the 12 months to August 2025, nearly double the Bank’s two per cent target. The central bank warned that the UK was “not out of the woods” on inflation, with rising food costs and administered prices contributing to persistent price pressures.
At its meeting ending on 17 September 2025, the MPC voted by a majority of seven-two to maintain Bank Rate at four per cent. Two members preferred to reduce the rate by 0.25 percentage points to 3.75 per cent, highlighting divisions within the committee over the appropriate pace of monetary easing.
Inflation Expected to Peak
The Bank said inflation was expected to rise slightly to four per cent in September before falling back towards the two per cent target thereafter. However, policymakers remained concerned about the potential for temporary price increases to embed themselves in wage negotiations and business pricing decisions.
“The Committee remained alert to the risk that this temporary increase in inflation could put additional upward pressure on the wage and price-setting process,” the Bank stated in its minutes.
Food price inflation has risen for five consecutive months, reaching 5.1 per cent in August 2025 – the highest level since January 2024. Small increases were recorded across vegetables, cheese and fish products, whilst energy prices remained elevated despite recent falls in wholesale costs.
Core inflation, which strips out volatile energy and food prices, stood at 3.6 per cent in August, down from 3.8 per cent in July. Services inflation, closely watched by policymakers as an indicator of domestic price pressures, fell to 4.7 per cent from five per cent.
Gradual Approach Signalled
The MPC emphasised that a “gradual and careful approach to the further withdrawal of monetary policy restraint remained appropriate,” suggesting that whilst rate cuts may resume, they would proceed cautiously.
“The restrictiveness of monetary policy had fallen as Bank Rate had been reduced,” the committee noted. “The timing and pace of future reductions in the restrictiveness of policy would depend on the extent to which underlying disinflationary pressures would continue to ease.”
Maxime Darmet, senior economist at Allianz Trade, welcomed the decision to hold rates steady. As inflation remains stubbornly high, the Bank of England holding its base rate steady is a welcome change of strategy from the previous series of cuts,” he said.
“This pause is likely to continue for at least the next six months, as the BoE navigates the delicate balance between persistent inflation and a looser labour market.”
Labour Market Weakening
The decision comes against a backdrop of weakening employment conditions, with unemployment stuck at 4.7 per cent – a four-year high. Wage growth has continued to slow, with annual regular pay increases falling to around five per cent in recent months.
Payrolled employees fell by 125,000 over the year to July 2025, whilst job vacancies dropped for the 38th consecutive quarter. The conflicting signals between rising inflation and weakening labour market conditions have complicated the Bank’s decision-making process.
“With inflation likely to hover between three per cent and 3.5 per cent – way above the two per cent target – through next spring, patience will be key,” Darmet added.
Quantitative Tightening Continues
During the meeting, the MPC also voted by a majority to reduce the stock of UK government bond purchases by £70 billion over the next 12 months, bringing the total to £488 billion. This continuation of quantitative tightening represents a further withdrawal of monetary stimulus introduced during the financial crisis and pandemic.
The Bank has been unwinding its massive bond-buying programme, which peaked at £895 billion in early 2022, as part of efforts to normalise monetary policy following years of ultra-loose conditions.
Rate Cut Timeline Pushed Back
Financial analysts had previously forecast at least one further rate cut before the end of 2025, potentially bringing the base rate down to 3.75 per cent. However, the persistence of above-target inflation has pushed back expectations for monetary easing.
“We foresee the next rate cut in April 2026, followed by further reductions later in the year, ultimately bringing the Bank Rate down to 3.25 per cent by the end of 2026,” Darmet predicted. “This cautious stance suggests the BoE is now committing to fighting inflation as its top priority.”
Market pricing shows only a 17.2 per cent probability of a rate cut in November, with December cuts seen as just 21.6 per cent likely. The shift in expectations reflects growing concern that inflation may prove more persistent than initially hoped.
Impact on Households and Businesses
The base rate directly affects mortgages, savings accounts, loans and credit cards across the country. Mortgage holders on variable or tracker deals see their monthly repayments rise or fall in line with Bank Rate changes.
Those coming to the end of fixed-rate mortgage deals face particular pressure, as new mortgage offers reflect current market rates. With the base rate remaining at four per cent, homeowners refinancing will continue to face significantly higher costs than during the ultra-low rate environment of recent years.
Businesses also face elevated borrowing costs, with economists warning this could dampen investment and hiring decisions. The combination of high interest rates and persistent inflation creates a challenging environment for corporate planning.
Conversely, savers benefit from higher interest rates as banks typically pass on some of the returns through improved savings rates. However, with inflation at 3.8 per cent, many savers still face negative real returns on their deposits.
Global Economic Uncertainty
The decision to hold rates also reflects broader uncertainty in the global economy. New trade tariffs, elevated oil prices and weaker growth forecasts internationally have complicated the UK’s economic outlook.
The Bank uses interest rates as its primary tool to control inflation, aiming to ensure price rises remain close to the two per cent target over the medium term. Over the past two years, the Bank raised rates from near zero to a peak of 5.25 per cent in August 2023 before beginning a gradual easing cycle.
Since August 2024, the Bank has cut rates from 5.25 per cent to four per cent, with policymakers treading carefully to avoid reigniting inflationary pressures. The August 2025 rate cut was passed by the narrowest of margins, with the MPC voting five-four to reduce rates.
Political Pressure Mounts
The decision comes despite growing political pressure for lower borrowing costs to ease the burden on households. With mortgage repayments significantly higher than during the pandemic era, many families face stretched budgets despite nominal wage growth.
The base rate is set by the nine members of the MPC, who vote on whether to raise, cut or maintain the current level. Recent meetings have seen increasingly split votes, with some members pressing for faster reductions whilst others favour maintaining a more restrictive stance.
Two members who voted for a cut at the September meeting argued that maintaining overly restrictive policy risked inflation undershooting the target and opening up an “unduly large output gap” in the economy.
Looking Ahead
MPC policymakers will next meet to discuss the trajectory of the Bank of England base rate on 6 November 2025. Markets and economists will closely watch incoming inflation and employment data for clues about the likely direction of policy.
The Bank faces a delicate balancing act between supporting economic growth and ensuring inflation returns sustainably to target. With inflation expected to remain elevated through early 2026, the era of ultra-low interest rates appears firmly in the past.
As one senior economist noted: “The Bank of England is walking a tightrope between persistent inflation and economic weakness. The decision to pause rate cuts signals that price stability remains the paramount concern, even as the labour market shows clear signs of cooling.”
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