The Bank of England kept interest rates unchanged at its meeting on Thursday, with the monetary policy committee voting by a majority of 7–2 to hold the base rate at 4%.
Two MPC members voted to reduce the rate to 3.75%.
Policymakers also voted by the majority to ease the pace of quantitative tightening (QT), reducing the stock of UK government bond purchases held for monetary policy purposes by £70 billion over the next 12 months.
The language used in the announcement of the decision largely remained the same, with a "gradual and careful approach" to further rate cuts seen to be the appropriate approach.
"The timing and pace of future reductions in the restrictiveness of policy will depend on the extent to which underlying disinflationary pressures continue to ease.
"Monetary policy is not on a pre-set path, and the Committee will remain responsive to the accumulation of evidence."
The two MPC members who voted for a cut of 25 basis points to 3.75% were Swati Dhingra and Alan Taylor, justifying their vote for a cut with signs of "emerging slack" and expectations that currently elevated inflation will "normalise".
Reaction
"With inflation heading in the wrong direction, there was no question that the Bank would be on hold today," said Schroders economist George Brown.
A slowdown in quantitative tightening (QT) from £100 billion had been flagged, though not to what extent.
"The Bank's announcement that it will allow £70 billion of gilts to roll off its balance sheet was broadly in line with our expectations, albeit meaning that active gilt sales will have to step up to £21 billion."
Andrew Goodwin at Oxford Economics said the MPC "appears to have been keen to avoid causing any market stress in arriving at a number close to what market participants had expected" for QT.
Focusing sales more on shorter maturities "reflects a desire to avoid adding to recent upward pressure on yields at the longer end of the curve", he added, with the 30-year yields having been at multi-decade highs.
Minutes from the MPC meeting "made no effort to prepare the ground for a November rate cut," Goodwin added.
"Concerns that inflation expectations may rise seem to be dominating the MPC's thinking. So, we expect it to extend the pause for the rest of this year, before resuming loosening policy in early 2026."
Elliott Jordan-Doak said the minutes indicated that rate-setters were more cautious, saying that "upside risks around medium-term inflationary pressures remained prominent in the Committee’s assessment".
He said the labour market "also appears less of a worry for rate setters", with the pace of payroll declines easing and bank staff also upgrading their forecasts for growth in Q3 to 0.4% from 0.3% previously.
Expectations before meeting
The MPC had not been expected to change interest rates, though an annoucement on the pace of its QT programme was predicted.
Policymakers are forecast to keep rates steady for the remainder of 2025 because inflation levels remain well above the MPC's 2% target, though a weaker jobs market and slow economic growth are concerns.
At the last MPC meeting in August, the benchmark interest rate was cut from 4.25% to 4.0% but a cautious approach in policy was reiterated due to the ongoing inflationary pressures.
That meeting saw a narrow 5-4 vote by MPC members, who also shared new economic forecasts, where CPI inflation was seen peaking at 4.0% in September before gradually easing to 2.7% in a year’s time and 2.0% in two years.
As regards the vote split for this September meeting, most economists predict a strong majority 7-2 vote in favour of keeping rates on hold.
"We also expect no change in the forward guidance," said UBS economist Anna Titareva, "with the MPC sticking to its previous message of a 'gradual and careful' approach to easing."
Looking ahead, Titareva acknowledged the risk around the timing of the next rate cut, which she expects will be in November.
"The fact that by the time of the November meeting the MPC will only have September CPI and the Autumn Budget will be delivered only on 26 November might be factors in favour of delaying the next cut until there is more evidence of inflation easing and clarity on the fiscal impact on inflation."
UBS expect there will be three 25bp rate cuts to 3% by July 2026.
Market analyst Joshua Mahony at Rostro said QT will be a key part of the announcement.
"With the BoE having to rely more heavily on active gilt sales to achieve reductions to its balance sheet, expectations are that it will signal a significant slowdown in the pace of QT," he said.
"For markets, a slower withdrawal of liquidity could ease some upward pressure on gilt yields, while also weighing on sterling if investors read it as a more dovish tilt in policy."