Bank of England Keeps UK Interest Rate at 4%

The Bank of England has kept interest rates at 4%, as the monetary policy committee noted that upside risk to inflation has become less pressing.

 The Bank said inflation reached its peak in September at 3.8% and is expected to fall gradually over the coming months before returning to its 2% target in 2027. It had earlier forecast a peak of 4%.

The committee voted by a majority of 5–4 to maintain Bank Rate at 4%. Four members voted to reduce Bank Rate by 0.25 percentage points, to 3.75%.

UK central bank noted that consume price index (CPI) inflation is judged to have peaked, saying that progress on underlying disinflation continues, supported by the still restrictive stance of monetary policy.

BoE explained that this is reflected in an easing of pay growth and services price inflation. Underlying disinflation is being underpinned by subdued economic growth and building slack in the labour market.

The committee stated that monetary policy is being set to balance the risks around meeting the 2% inflation target sustainably.

“The risk from greater inflation persistence has become less pronounced recently, and the risk to medium-term inflation from weaker demand more apparent, such that overall the risks are now more balanced. But more evidence is needed on both”.

BoE said the extent of further reductions will depend on the evolution of the outlook for inflation. If progress on disinflation continues, Bank Rate is likely to continue on a gradual downward path.

Recent data shows inflation stabilising due to slower increases in food prices and weaker wage growth. However, the MPC said “more evidence is needed” to assess the risks of sustained inflation and slower economic growth.

Policymakers also highlighted a weaker outlook for the labour market. The UK unemployment rate is projected to rise to 5.1% in the second quarter of 2026, up slightly from the previous forecast of 5%.

The Bank raised its unemployment projections for the next two years, noting that “nearly half” of companies had already reduced employment more than planned because of higher National Insurance costs.

Its latest survey showed business confidence remains low, with many firms delaying investments due to uncertainty ahead of the autumn Budget.

The decision to hold rates adds pressure on Chancellor Rachel Reeves as she prepares the budget later this month. Government finances have faced strain from high borrowing costs, although stronger growth could help boost tax revenue and spending plans.

On Thursday, the Bank lifted its growth forecast for 2025 to 1.5% from 1.2%, kept its 2024 outlook at 1.2%, and slightly increased its 2027 forecast to 1.6%.

Andrew Bailey, governor of the Bank of England, said: “We held interest rates at 4% today. Bailey noted that upside risks to inflation have become less pressing since August, said he sees further policy easing to come if disinflation becomes more clearly established in the period ahead.

Recent evidence points to building slack in the economy, and the latest CPI data were promising. But this is just one month of data.

“Labour costs remain elevated and wage growth, while on a downward path of late, may plateau. In assessing the outlook, I find the mechanisms underlying upside risks less convincing than those underlying the downside”.

Rachel Reeves said: “Under this Government, we have seen five interest rate cuts that have helped bring down costs for families and businesses and today’s forecast shows that inflation is due to fall faster than previously predicted.

“At the Budget later this month I will take the fair choices that are necessary to build the strong foundations for our economy so we can continue to cut waiting lists, cut the national debt and cut the cost of living.” Naira Reclaims Value as External Reserves, FX Liquidity Improved

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