The Bank of England (BoE) has opted to keep its key interest rate unchanged at 4%, signaling caution as inflation remains stubbornly above target and economic growth shows little momentum.

The Monetary Policy Committee (MPC) voted 7–2 in favor of maintaining the rate, with two members arguing for a 0.25 percentage point cut to support growth and jobs.

"We expect inflation to return to our 2% target, but we're not out of the woods yet, so any future cuts will need to be made gradually and carefully," Governor Andrew Bailey said, clarifying that the battle against inflation was not over.

The UK’s decision to hold rates contrasted with the US and Canadian central banks' decision to cut this week to prevent a further erosion in their labor markets. Australia and New Zealand lowered rates at their last meeting to stimulate their economies in the face of slowing inflation.

BoE policymakers have attempted to balance the risks of increasing inflation with a continued slowdown in the jobs market. Unemployment stayed at a four-year high of 4.7% in the three months preceding July 2025.

September's UK inflation reading held at 3.8%—the highest among advanced economies. The five-year inflation chart shows the re-accelerating inflation after a bottom in 2024.

BoE Plans to Slow Quantitative Tightening

The central bank also announced it would slow its quantitative tightening (QT) program. It will also reduce the pace of government bond sales from £100 billion to £70 billion annually, with fewer long-dated gilt auctions.

Bailey explained that the move would allow the BoE to shrink its balance sheet and minimize disruption to debt markets. Higher long-term yields have already strained.

"The real action may lie not with the Bank, but with Westminster," Isaac Stell, investment manager at Wealth Club, noted for CNBC. "The BOE remains sat on the sidelines, waiting to see what tax and spending decisions emerge in the budget. Moves prior to this could backfire."

British Prime Minister Keir Starmer's Labour government will be hard-pressed to spur economic growth after GDP flatlined in July. His party has confronted an increasingly hostile public in response to the government's immigration and economic policies.

The public's frustration with Labour policies spilled out on the streets of London on Saturday. About 150,000 people, including families from diverse backgrounds, attended the "Unite the Kingdom" rally.

BoE Rate Decision in Line with Expectations

The BoE rate decision didn't surprise the market, though opinions diverge on the next move. Some brokerages, including Goldman Sachs and J.P. Morgan, see cuts postponed until 2026, while others, like Barclays, believe a November cut remains on the table.

The central bank's decision to hold the rates offers stability, but without much relief to households and businesses. Mortgage holders, particularly those with variable-rate products, continue to face elevated repayments at a time when wages struggle to keep pace with inflation. In turn, this reduces their disposable income and hurts their spending.

Meanwhile, prospective homebuyers find affordability a growing challenge, as high borrowing costs exacerbate the impact of elevated house prices.

"Aside from those who have no choice, we would now expect to see thousands of borrowers delay remortgaging until rates drop next year. When this does happen, the flood gates will open. There will be an enormous, almost unmanageable surge in demand for the cheapest rates," Joe Pepper, CEO of PEXA UK, said.

For British businesses, particularly credit-reliant small and medium enterprises, the hold means expensive financing, slower hiring, and investments. Larger corporates may benefit from the BoE's slower pace of quantitative tightening. This could ease gilt market pressures and lower long-term yields, but that impact is gradual.

Any near-future rate cuts would bring incremental relief, yet the central bank is cautious due to elevated inflation. Thus, households and firms should prepare for an extended period of tighter financial conditions.

Global Central Banks Are Diverging on Rate Strategies

While the BoE opts for caution, other major central banks are moving on different trajectories.

In Washington, the Federal Reserve cut its benchmark rate by 25 basis points last week, lowering the federal funds rate to 4.0–4.25%. It was the first cut of 2025, following 100 basis points of reductions last year.

The decision, however, was not unanimous: newly appointed FOMC member Stephen Miran dissented, calling for a sharper 50-basis-point cut. The updated "dot plot" indicates two further cuts this year, with officials shifting their focus from inflation toward rising labor market risks..

Chairman Jerome Powell noted that job gains have slowed and unemployment has edged higher, altering the balance of risks. The central bank delivered a policy long-sought by President Donald Trump, though significantly short of Trump’s desired outcome.

Ahead of the rate cut, Trump reiterated his criticism of Powell. He said in a social media post on Monday that the Fed chair “MUST CUT INTEREST RATES, NOW, AND BIGGER THAN HE HAD IN MIND."

Canada Cuts Rates to Lowest in Three Years

The Bank of Canada also reduced rates by 25 basis points, taking its policy rate to 2.5%, the lowest in three years. Governor Tiff Macklem cited a weakening labor market—with over 100,000 jobs lost in recent months—and slowing household spending as justifications for easing.

Their decision was unanimous, and Macklem noted that the BoC is prepared to cut further if economic conditions deteriorate. Markets now expect at least one more cut before year-end, bringing the rate closer to 2.25%.

Construction consultancy BTY expects a positive impact of these cuts on the activity in that sector.

"Despite the slower pace of growth seen thus far, the construction sector in Canada and the US remains occupied with delivering new housing and infrastructure updates across a wide range of regions," they wrote in a note. "With both country's central banks reducing interest rates, there's potential for a slight uptick in activity, especially if rates continue to be adjusted downward in the coming months."

Meanwhile, the Bank of Japan (BoJ) kept its policy rate unchanged at 0.5%. But dissent within the board suggested a shift may be near. Two members pushed for a hike, an unusually hawkish signal from a central bank long committed to ultra-loose policy.

The BoJ also announced plans to sell exchange-traded funds and real estate investment trusts—assets it accumulated during years of extraordinary easing. The dissenting votes and policy signals fueled speculation that the BoJ could deliver a hike at its October meeting, signaling a potential turning point for Japan's financial market.

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