Interest rates held at 4% but ‘door open’ for a post-Budget cut

Interest rates have been kept at 4% following a narrow vote that experts say opens the door to borrowing costs being cut in December.

The central bank’s Monetary Policy Committee (MPC) opted to keep the rates the same at the final meeting before the autumn Budget.

Members of the nine-strong committee voted five to four in favour of maintaining the rate, which is used to dictate mortgage rates and other borrowing costs.

But the closeness of the vote, as well as speculation that possible tax rises in the upcoming Budget could push down on inflation, have increased the likelihood of rates being cut before the end of the year, according to experts.

Yael Selfin, KPMG UK’s chief economist, said: “Despite today’s decision to keep interest rates unchanged, the narrow vote split and the more dovish tone in the minutes suggests the door remains open for a rate cut at the December meeting.

“Key data releases on inflation and the labour market, in addition to more clarity on fiscal policy following the Budget, will likely be enough to persuade a majority of MPC members to vote for a rate cut.

“We expect base rates to fall to 3.75% by the end of the year.”

The Bank suggested that inflation peaked in September, at 3.8%, and is expected dip over the coming months before settling at the 2% target rate in 2027.

It had previously predicted that inflation would peak at 4%.

Inflation has steadied in recent months on the back of slower increases in food prices and weaker wage growth.

Rate-setters however indicated that “more evidence is needed” regarding the risks of persistent inflation and weaker economic growth in their deliberations.

“The extent of further reductions will depend on the outlook for inflation,” Bank of England governor Andrew Bailey said.

“We still think rates are on a gradual path downwards but we need to be sure that inflation is on track to return to our 2% target before we cut them again.”

He added that it’ll be “really important” to see more economic data before its next decision in December, at which point the MPC will have also been able to assess the fiscal policies set out by Chancellor Rachel Reeves.

Ms Reeves is widely expected to raise taxes in the Budget to meet spending plans and to balance the books, with Government finances coming under pressure from higher borrowing costs over the past year.

Martin Beck, chief economist at WPI Strategy, said: “The upcoming Budget is likely to tighten policy by £30 billion to £40 billion through a combination of tax rises and spending restraint.”

He said that “scale of fiscal squeeze would justify a 25–50 basis point reduction in Bank Rate”.

Meanwhile, policymakers at the Bank pointed to a continued worsening of the outlook for the labour market.

The UK unemployment rate is now on track to peak at 5.1% in the second quarter of 2026, having previously predicted a high of 5%.

The Bank also slightly increased its unemployment projections for the next two years.

Evidence in the Bank’s latest report showed “nearly half” of companies said they “had already lowered employment by more than they would otherwise have done” due to increases to employer National Insurance Contributions.

Its industry data also showed that business confidence “remains weak”, with subdued plans for investment.

Companies highlighted elevated uncertainty before the Budget, suggesting it led to some firms delaying spending plans.

Ms Reeves has been hopeful that stronger economic growth can help increase tax revenues and support Government spending plans.

On Thursday, the Bank increased its economic growth projection for 2025 to 1.5%, from 1.2%.

It maintained its forecast of 1.2% for next year and marginally improved its forecast for 2027 to 1.6%, from 1.5%.