Divided Bank of England holds key interest rate at 4% despite hopes inflation has peaked

The Bank of England has kept its main interest rate unchanged at 4% as inflation in the U.K. remains markedly above target and policymakers await this month’s budget from the U.K. government, which could be one of the most consequential in years

LONDON -- The Bank of England kept its main interest rate unchanged at 4% on Thursday with policymakers indicating that they need more information on how swiftly inflation will fall back towards their target.

Thursday’s decision by the nine-member rate-setting body to maintain Bank Rate — a benchmark for mortgages as well as consumer and business loans — was widely anticipated, though some economists thought there was a chance that borrowing rates would be reduced by a further quarter of a percentage point to 3.75%.

The vote was tight though, with five voting for unchanged rates and four backing a cut.

“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," said Bank Governor Andrew Bailey.

The main reason why rates were kept on hold is that the annual rate of consumer price inflation is standing at 3.8%, nearly double the bank's target.

In minutes accompanying the decision, the Monetary Policy Committee said inflation has likely “peaked” at a lower level than its previous prediction of 4% in August, when it last cut interest rates to 4%.

With inflation set to fall in coming months and possibly back to the target next year, many economists think a cut is possible at the next rate-setting meeting in December.

Much could hinge on the U.K. government's budget on Nov. 26, which is expected to be one of the most consequential in years.

Treasury chief Rachel Reeves has put the country on notice that taxes will likely have to be raised in the budget, which could have a depressing effect on an already moribund economy and therefore prices. She has also indicated that one of the key missions of her budget will be to get inflation lower.

“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," Reeves said after the bank's decision.

Since it started cutting borrowing rates in August 2024 after the unwinding of the previous spike in inflation in the wake of Russia’s invasion of Ukraine, the bank has done so in a gradual manner every three months. Thursday's decision was the first time it opted against a rate cut on this quarterly timescale.

Last week, the Federal Reserve cut its key interest rate for a second time this year as it seeks to shore up economic growth and hiring, even as inflation stays elevated.

But Fed Chair Jerome Powell also cautioned that further rate cuts weren’t guaranteed, citing the government shutdown’s interruption of economic reports and sharp divisions among 19 Fed officials who participate in the central bank’s interest-rate deliberations.

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