Bank of England chooses caution ahead of Autumn Budget

Chancellor Rachel Reeves delivering a speech earlier this month ahead of the Budget on 26 November. Photo by WPA Pool/Getty Images.

Today’s interest rate decision was expected to be tight, and that indeed came to pass.

At its penultimate meeting of 2025, the Bank of England’s Monetary Policy Committee (MPC) voted by a slim majority of five to four to maintain the Bank Rate at 4%, with the quartet preferring a 0.25 percentage point cut to 3.75%. This is the first time the central bank has held interest rates in consecutive meetings since it kickstarted the rate-cutting cycle in August 2024, perhaps treading carefully with the Autumn Budget zooming into focus.

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Most economists predicted rates would be held today, but encouraging inflation data combined with slowing wage growth, placed the vote on a knife edge.

The consumer prices index (CPI) has proved sticky recently, registering 3.8% in each of the past three months. While this is almost double the Bank’s 2% target, inflation was anticipated to accelerate during this period, signalling that price rises may have peaked – something the Bank referenced in today’s summary notes.

There is every chance a rate cut will arrive next month, when the MPC holds its final meeting of 2025. “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,” the Bank said today. When policymakers announce their next decision on 18 December, they will have two further months of inflation data to consider, providing a richer picture on the future path of price rises.

The Bank went further on its notes, with no plans to deviate from its cautious approach to lowering rates: “The restrictiveness of monetary policy has fallen as Bank Rate has been reduced. The extent of further reductions will therefore 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.”

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In positive news for households, the outlook for inflation has begun to brighten. Speaking at a news conference after today’s announcement, Bank Governor Andrew Bailey said that inflation will drop close to 3% early next year and head to the 2% target thereafter.

How might the Budget impact inflation and interest rates?

The measures announced at this year’s Autumn Budget, set for 26 November, may have a strong bearing on what policymakers decide to do next month, especially if the chancellor reveals a package of painful tax hikes, which now seems inevitable.

In theory, tax increases on households should tame inflation as it restricts consumer spending, but the reality can be more complicated.

Some experts believe that hiking income tax could help to ease price rises, thus accelerating the pace of interest rate cuts. Isaac Stell, Investment Manager at Wealth Club said that the fiscal tightening at this year’s Budget will likely do the “heavy lifting” for the Bank’s fight against inflation. “Although perversely the previous Budget both tightened fiscal policy and increased inflation, Reeve's will be reluctant to make that same mistake twice,” added.

Stell was inevitably referencing the move to hike employer national insurance contributions (NICs) and lower the earnings threshold that NICs become payable, and push up the national living wage. These took effect in April and have added to the UK’s inflation pressures. While higher energy and food costs proved bigger driver, the NIC reforms seem to have “kept the growth in labour costs higher than it otherwise would have been,” according to an economic update in the House of Commons Library, published on 29 September.

Rachel Reeves’ “scene setting” pre-Budget address earlier this week offered the strongest hint yet that tax increases are on the cards in three weeks’ time. Until recently, the government has been firm in its commitment not to raise taxes on working people, a commitment laid out in its election manifesto.

But Reeves’ and Starmer’s repeated refusals to entertain questions on the subject has stoked fears that reforms to income tax, VAT and employee national insurance contributions (NIC) are fair game this parliament. The chancellor’s comments that “each of us must do our bit”, alongside reaffirming her staunch commitment to her ‘iron clad’ fiscal rules, only served to increase the odds, particularly as the fiscal deficit is expected to be around £30 billion – three times larger than the chancellor’s £9.9 billion headroom. As ex-Chancellor George Osborne explained on Tuesday to the Treasury Committee: “If you don't use one of the big taxes, you are left with lots of little ones.” However, Osborne cautioned that rowing back on a manifesto pledge isn’t a straightforward decision.

According to Reeves, the measures announced at this year’s set-piece fiscal event will seek to assuage the punishing impact of inflation on household finances. “Interest rates, which rose from 0.1% to 5.25% in the last Parliament, have now been cut five times, but at 4% they are still a constraint on business borrowing and a burden on family finances,” Reeves said on Tuesday.

The chancellor added: “The choices I make in the Budget this month will be focused on getting inflation falling and creating the conditions for interest rate cuts to support economic growth and improve the cost of living.”

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One key area affecting individuals and families right now is housing costs. Rents have skyrocketed in response to higher interest rates, choking the disposable incomes of budding homeowners who are finding it increasingly hard to accrue a sufficient deposit, in the absence of outside help at least.

Borrowers hoping to see their monthly repayments ease were given a boost yesterday, after it was revealed the average mortgage rate had dipped back below 5%, with further falls expected over the coming weeks and months. This trend is being driven by falling money market swap rates and increased competition among lenders who are battling it out to entice buyers.

We should note that anyone on a variable-rate mortgage will have to wait to see their repayments reduce, as they typically respond to Bank Rate movements.

But mortgages and rents aren’t the only financial headwind hitting household purse strings. 

Tax is another factor, notably the ongoing freeze to income tax thresholds, which is resulting in more of our pay packets swallowed up by HMRC as our earnings rise. If Reeves does opt to increase the rates of income tax later this month, millions of people up and down the country will feel a further pinch. The question is whether this will speed up interest rate cuts, leading to cheaper borrowings, thus helping to offset the additional tax burden on those with mortgages.