UK interest rates: Bank of England remains on pause awaiting clarity

A relatively benign September inflation reading and some clear signals of a fiscally tight Budget from the Chancellor casted some doubt on a pause ahead of today’s Bank of England (BoE) 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 the Autumn Budget that might yet contain some inflationary elements alongside demand-dampening tax rises. 

The decision to not cut rates was a close-run affair. The Monetary Policy Committee (MPC) voted by five to four on Thursday to keep borrowing costs steady, after cutting rates five times since the summer of 2024.

What’s 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. Potentially as early as December. 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. 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: labour market data around pay settlements, inflation releases and the precise content of the Budget on 26th November. 

• Pay growth: while the labour 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’s helping apply upward pressure to prices.
• Inflation: September’s softer-than-expected consumer price index (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: the Chancellor is keen to bear down on rising prices to relieve pressure on households and lower the cost of government borrowing. Therefore, 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 Ms Reeves 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 competitive rates available around the 4% mark, but it does mean shopping around. A cash platform such as Charles Stanley Direct Cash Savings could assist in getting a competitive deal. For instance, the best available easy access rate at the time of writing is 3.97% AER. 

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 account have little chance of improving and could instead drop further. At the moment a 12-month fix around the 4.3% level is achievable.

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