Bank: CPI inflation is judged to have peaked
Newsflash: The Bank of England believes the recent rise in UK inflation is over.
Announcing today’s decision to leave interest rates on hold, the Bank declares “CPI inflation is judged to have peaked.”
UK inflation has been recorded at 3.8% in July, August and September – and the Bank is expressing confidence that the process of ‘disinflation’ isn’t over.
Its latest Monetary Policy Report, just released, predicts that inflation is likely to fall to close to 3% early next year before gradually returning towards to the 2% target over the subsequent year.
It says:
Progress on underlying disinflation continues, supported by the still restrictive stance of monetary policy. This is reflected in an easing of pay growth and services price inflation. Underlying disinflation is being underpinned by subdued economic growth and building slack in the labour market.
The Bank had previously forecast that inflation would peak at 4% in September.
Updated at 07.16 EST
Key events
Show key events only
Please turn on JavaScript to use this feature
Janet Mui, head of market analysis at wealth manager RBC Brewin Dolphin, agrees that governor Andrew Bailey’s vote will be ‘crucial’ in deciding whether the Bank of England cuts interest rates in December:
With widespread expectation of potential tax hikes in the Autumn Budget, there is a plausible case for even weaker demand hence pushing inflation lower from 2026. The difficulty is that the BoE cannot consider hypothetical impact in its assessment prior to knowing the exact measures in the Budget.
We will, therefore, only get more clarity post Budget and Governor Bailey’s vote will be crucial. Overall, markets believe the BoE has opened the door for a rate cut in December and has priced in that happening.”
ShareBank of England rate cut: what the experts say
Reaction to today’s UK interest rate decision (no change) has been pouring in.
Paul Dales, chief UK economist at Capital Economics, believes today’s decision to hold rates at 4% is a pause in the downward trend in interest rates rather than the end.
Dales says:
With a tightening in fiscal policy in the Budget on 26th November on the cards, the Bank will probably resume cutting rates in the coming months. We still think rates will be cut to 3.00% next year rather than to the 3.50% priced into the financial markets.
Kathleen Brooks, research director at XTB, says UK borrowers could get an early Christmas present from the Bank of England in December:
The Bank of England voted to keep rates on hold today, but there could be rate cuts coming as soon as next month. The most interesting part of this meeting was the vote split, which was 5-4 in favour of remaining on hold. Also, for the first time we got detailed reasons why each member voted as they did.
The immediate market reaction to the decision was a rush to reprice December rate cut expectations, and, surprisingly, the pound is higher vs. the USD and the EUR. The interest rate swaps market is now pricing in a 65% chance of a rate cut next month, this is up from 29% at the start of this week, there is also a 52% chance of a cut in February.
James Smith, ING’s developed markets economist for the UK, is more convinced that a rate cut is coming in December, adding:
Everything hinges on Governor Andrew Bailey’s vote – and his comments make it abundantly clear that he is siding with the doves.
Matt Swannell, chief economic advisor to the EY ITEM Club, says the MPC was “unusually divided”, leading to the narrow 5-4 vote, adding:
Today’s decision clearly opens the door to a December cut, but that remains contingent on the incoming data. If there are further signs of falling inflationary pressures in the coming months and if the bulk of the tax rises expected at the Autumn Budget are introduced almost immediately, then there might be a slim majority on the Committee in favour of a Christmas cut. Any future cuts are likely to come at a relatively gradual pace as the Committee continues to remain wary of lingering inflationary pressures.”
ShareUS job cuts in October hit 22-year high as firms embrace AI
Away from the Bank of England’s interest rate decision, we have new signs that artificial intelligence is hitting the jobs market.
U.S.-based employers announced 153,074 job cuts in October, up 175% from the 55,597 cuts announced in October 2024, outplacement firm Challenger, Gray & Christmas has reported. That’s the highest for the month since October 2003.
Photograph: Challenger, Gray & Christmas.
Andy Challenger, chief revenue officer for Challenger, Gray & Christmas, says some companies are reducing headcount after adding staff during the Covid-19 pandemic, while others are halting hiring as they adopt AI.
Challenger explains:
“October’s pace of job cutting was much higher than average for the month. Some industries are correcting after the hiring boom of the pandemic, but this comes as AI adoption, softening consumer and corporate spending, and rising costs drive belt-tightening and hiring freezes.
Those laid off now are finding it harder to quickly secure new roles, which could further loosen the labor market.
So far this year, US employers have announced 1,099,500 job cuts, an increase of 65% from the 664,839 announced in the first ten months of last year. That’s the highest level since 2020.
John-Paul Ford Rojas of the Daily Mail says people are worried that income tax will go up in the budget – would that give the Bank any impetus to cutting interest rates in December?
Andrew Bailey sticks to his guns, repeating that the Bank will assess the budget measures when they are announced, rather than speculating about fiscal policy.
Szu Ping Chan of the Telegraph asks whether government action in the last year has helped, or hindered, the fight against inflation.
Andrew Bailey resists any temptation to criticise the Treasury. He points out that the government has many public policy objectives. For example, that can mean allowing water bills to rise to fund the clean-up of the water industry – it’s not for the Bank to oppose that (but it can point out the impact on inflation).
My colleague Phillip Inman looks forward, asking why the Bank doesn’t expect to cut rates more quickly in 2026. The Bank’s scenarios show growth slowing and unempoyment rising in 2026, so why does they show restrictive interest rates?
Andrew Bailey replies that the degree of restrictiveness is easing, and the Bank will continue to assess how restrictive the cost of borrowing is.
Joel Hills of ITV News asks why the Bank doesn’t support strong pay growth.
Andrew Bailey replies that pay growth is an important determinent of inflation, while inflation expectations help to determine wage negotiations.
We have been though a period where pay settlements were well above where our models suggested they would be.
Pay settlements are coming down, he adds, and they will be an “important part of our considerations”.
Phil Aldrick of Bloomberg asks if the Bank would welcome action by Rachel Reeves to slow increases in regulated prices.
Deputy governor Clare Lombardelli says that the Bank thinks around 0.4% of the current 3.8% inflation rate is due to those administered prices.
ShareBailey: I want more evidence that inflation has peaked before voting to cut rates
Helia Ebrahimi of Channel 4 asks how Andrew Bailey can justify leaving interest rates on hold when the Bank believes inflation has peaked.
The governor (who was effectively the swing voter in today’s 5-4 split) replies that he wants to see more evidence that inflation has passed its peak.
Deputy governor Dave Ramsden (who did vote for a cut) provides some support for Bailey from the governor’s left flank, pointing out that inflation is still 3.8% – a long way above the Bank’s 2% target.
ShareBailey: There could be an AI bubble
Asked about the risks of an artificial intelligence bubble in the financial markets, Andrew Bailey says it’s a danger, but also suggests AI could have significant benefits even if valuations are too high.
The BoE governor tells reporters:
“The markets could overprice the returns, but the returns could still be substantial.
So we’ll see, but we are watching the … implications for financial stability.”
“It is, of course, perfectly possible and perfectly consistent that AI could be the next big mover in terms of productivity … My own view personally is, I think, more likely than not it probably is.
“But we’ve still got quite a way to go to actually sort of see that demonstrated. At the same time, we could have a bubble, because obviously the markets are pricing the future stream of returns from this, and that’s uncertain. And so, you know, those two things are not inconsistent.”
There’s no escape from the budget today!
Dharshini David of the BBC asks if the recent increase in national insurance rates, and the minimum wage, made the Bank more hesistant to cut rates.
Andrew Bailey says the Bank wanted to see how businesses responded to these higher costs.
He says some firms have cut back on hiring, while others have raised salaries by less.
Sam Fleming of the Financial Times reminds Andrew Bailey that he has suggested he agrees with current interest rate market pricing* – does that mean 3.5% is the likely terminal rate for the Bank of England – what is the range of views on this on the committee?
(Terminal rate is the point in an easing cycle when a central bank stops cutting interest rates).
Governor Bailey replies that the market curve gives a ‘sensible path’ for interest rates, which isn’t always the case.
On the terminal rate issue, he says the committee are split in two camps – some policymakers do have a prediction, and others (including Bailey) who don’t think there is enough confidence in any estimate of an equilibrium level of rates.
* – in the minutes, Bailey says “Current market pricing is close to the path suggested by a forward-looking Taylor rule, which is a fair description of my position at present.”
Mehreen Khan of The Times asks Bailey about Rachel Reeves’s pre-budget speech on Tuesday, in which the chancellor said she wanted to help the Bank to cut interest rates by fighting inflation. Was the governor not convinced?
Andrew Bailey replies that the Bank is not passing any judgement on what the chancellor said this week, it will wait to hear the budget.
Onto questions….
Ed Conway of Sky News asks what impact the impending budget had on today’s interest rate decision.
Andrew Bailey says the Bank only knows one thing for certain – there’ll be a budget on 26 November.
He adds that the Bank takes its decisions based on known government policy; it won’t speculate about what might be in the budget.
It appears that the Bank of England is keen to hear Rachel Reeves’s budget, in just under three weeks, before deciding it is safe to cut interest rates.
Governor Andrew Bailey says the Bank will receive more data on inflation and cost pressures in the run-up to its next MPC meeting in December.
The bank will also be able to analyse how this year’s budget will influence the economy and the outlook for inflation, he adds.
Worryingly, the governor of the Bank of England then points to signs that the economy is weakening.
Andrew Bailey points out that household consumption growth has been weak, with the Bank only expecting a limited recovery in the near term.
A chart showing UK consumption Photograph: Bank of EnglandShare
Andrew Bailey then presents the press with several charts to show why the Bank of England believes disinflation will continue, and why it expects wage growth to slow.
Photograph: Bank of England Photograph: Bank of England Illustration: Bank of EnglandShareBailey: Two risks will determine future changes to monetary policy
Andrew Bailey confirms that the Bank believes inflation has reached its peak, at 3.8% in the last few months.
He says progress in disinflation has allowed five rate cuts, but cautions that future changes to monetary policy depend on two big factors.
First, inflation is still well above the Bank’s 2% target – and there is a risk that it could be sticky, and that inflation expections could have been pushed higher. That could keep inflation higher for longer.
On the other hand, activity in the economy is below its potential – as shown by falling vacancy numbers and stalling employment growth. If households and businesses are cautious about spending, inflation could fall below target.