BoE holds fire - But a December rate cut now looks imminent
A narrow split signals a turning point
The Bank of England’s Monetary Policy Committee (MPC) voted 5-4 to hold Bank Rate at 4% today, a result that underscores how close the Bank is to restarting the easing cycle that began in the summer of 2024.
Two external members, Swati Dhingra and Alan Taylor, again voted for a 25 basis-point reduction, consistent with their dovish track record. But in a significant shift, they were joined by BoE deputy governors Dave Ramsden and Sarah Breedon, marking the first time this cycle that two senior internal members broke ranks with the Governor’s majority. This signals a growing conviction within the core of the Committee that policy has become too restrictive.
The debate within Threadneedle Street
For the first time, each MPC member was given space in the minutes to set out their reasoning. The four members backing a cut argued that with disinflation becoming established and high household saving weighing on consumer spending growth, monetary policy risked being too restrictive. Within this group, Dhingra and Taylor went further, fearing an undershoot of the inflation target in the medium-term.
The majority, including Governor Andrew Bailey, maintained that inflation could remain sticky and recent progress towards lower inflation stall, but Bailey acknowledged that the balance of risks had become more even. His caution suggests a readiness to pivot once more data confirms the slowdown in wage growth and services inflation.
That hesitation, but also openness, makes a December rate cut increasingly likely.
Fiscal tightening strengthens the case for easing
We think the upcoming Budget will tighten fiscal policy by £30–£40bn, primarily via tax rises and a smaller role from public spending restraint. Based on the OBR’s fiscal multipliers and the Bank’s own model sensitivities, such a squeeze would warrant a 25–50bp rate cut to offset the disinflationary drag on growth.
However, these potential Budget effects were not factored into the Bank’s latest forecasts, which nudged GDP projections slightly higher. In that sense, the MPC’s baseline view may soon be out of date, strengthening the case for a near-term correction in December.
Inflation: Falling faster than the BoE expects
While the Bank trimmed its inflation outlook, it still projects CPI returning to target only by mid-2027. We think this is too conservative.
Our assessment is that CPI inflation will reach 2% in the second half of 2026, driven by several factors:
Wage growth will moderate further as labour demand softens and base effects from late 2024’s strong rises in earnings kick in.
Tax and regulated price rises that lifted prices in April 2025 will fall out of the annual comparison in early 2026, mechanically pushing inflation lower.
Falling inflation expectations should, in turn, ease pay demands further.
Together, these effects point to faster disinflation and give the MPC space to cut sooner.
Outlook: Rate cuts to support growth
A December rate cut would be a logical step to maintain growth momentum while guiding inflation back to target in an orderly way. We also expect a further cut in rates in Q1 2026, bringing Bank Rate closer to the BoE’s estimated “neutral” level of around 3%.
With both interest rates and inflation trending lower, the easing of monetary conditions should help cushion the drag from tighter fiscal policy. Lower borrowing costs should
Support consumer confidence and encourage households to draw down excess savings.
Stimulate credit growth and housing market activity.
Provide a modest boost to business investment, especially in interest-sensitive sectors such as real estate, construction, and capital goods.
These factors underpin our above-consensus forecast for a modest pickup in UK GDP growth next year.
Implications for business
Borrowing costs for firms are likely to fall further into 2026, easing financial pressures on leveraged corporates and interest sensitive sectors.
Sterling could weaken modestly as rate differentials narrow with the US and euro area, improving competitiveness for exporters.
Consumer-facing industries may benefit from firmer spending, while construction and housing are poised for a further rebound.
However, the combination of fiscal tightening and cautious sentiment may keep overall demand growth moderate through 2026.
Our Take
The tone of this meeting marks a turning point in UK monetary policy. The MPC’s internal cohesion is eroding, and Governor Bailey’s remarks suggest that only limited additional evidence is needed to justify a shift.
We continue to expect a rate cut when the MPC’s next decision is announced on 18 December, followed by a gradual easing path through 2026. Monetary policy will likely become the primary counter-cyclical tool next year, as fiscal policy tightens.
For businesses and investors, the message is clear: the (relatively) high-rate era of the last few years is ending. Planning for a lower-rate, low-inflation environment should begin now.
