In September 2025, the Bank of England (BoE) decided to keep its benchmark interest rate at 4% as the bank remained careful to consider the implications of high inflation and lower economic growth in the economy. In what seems to indicate a more determined attempt to impose tighter financial conditions, the MPC also decided to step up the pace of the sale of government bonds, adjusting the stock of gilts for monetary policy purposes down by £70 billion in the next year. The MPC and the bank’s staff, for the second time in a row, decided to hold the policy rate constant, which follows a sequence of interest rate cuts over the year.
The Bank of England reduces borrowing costs from 4.75%
In the vote, there were 7 in favor of this decision, while 2 stood for a rate cut by 25 basis points to 3.75%. During the first quarter of this year, the bank had also reduced the borrowing costs from a peak of 4.75%.
The bank’s Governor, Andrew Bailey, emphasized the need for vigilance, stating that there is no room for complacency in the fight against inflation. His words show the Bank’s concern that inflation still has the potential to inflate, bringing back wage and price-setting pressures.
“Although we expect inflation to return to our 2% target, we’re not out of the woods yet so any future cuts will need to be made gradually and carefully”
Consumer Price Index inflation was 3.8% in August. It is anticipated to increase slightly in September, and then decrease gradually to meet the 2% target. Although there has been an increase in pay growth, it is expected to slow even more in the upcoming months. Services inflation has stagnated, yet there are still upward risks to medium-term inflation.
The MPC stated that underlying disinflation continues, and there has been more moderating progress in wages rather than prices. Nonetheless, the committee is on the lookout for renewed inflationary pressures on wages and prices due to the recent increase in inflation.
UK GDP growth is slowing due to major factors, including geopolitical
The UK GDP growth is still low, and this is consistent with a gradual loosening in the labor market and slack in the economy. The BoE recognized downside risks regarding trade and fiscal uncertainty in Europe and other geopolitical factors, including some domestic factors.
September forecasts held that the limited market reaction to the gilt announcement is expected to continue. Analysts are growing restless with the current BoE rate policy, with conflicting views on future monetary action. Sustained growth with a decline in inflation expected to continue is defined as a rate cut, while the remaining disadvantaged extreme sees an inflationary impact with positive growth. The continued Bank of England’s cautious tone suggests these future predictions will be determined from available and reliable economic data.
The road ahead: How the BoE intends to reduce inflation sustainably
The Bank of England’s continued evidence-based practices in its September decision suggest a significant amount of work still needs to be done. The Bank’s cautious tone suggests that any future rate adjustments will be data-driven and responsive to evolving economic conditions.
Former economist, Carsten Jung:
“The Bank was right to slow the unwinding of its economic support program – quantitative tightening. It has added unnecessary pressure on gilt yields at a time of global pressures”
The approach to selling gilt securities is having a restriction covering (due to a significant amount of work needing to be done to reverse inflation, selling assets will need to be done). The approach will be to maintain economic growth while reducing inflation from 4% to the target of 2% in a sustainable manner. According to Bailey, the rate cuts can still be exercised as the inflation target has been exceeded and economic growth is still fragile.