Bank of England holds interest rates at 5%

The Bank of England held interest rates at 5 per cent on Thursday and voted to run down its stock of British government bonds by another £100 billion (€119 billion) over the next year, weighing on the government’s finances.
The bank’s monetary policy committee voted 8-1 to keep rates on hold, with only external member Swati Dhingra pressing for a further quarter-point rate cut at this time after the Bank of England last month delivered its first reduction to borrowing costs since 2020.
Economists polled by Reuters had forecast a 7-2 vote to keep rates on hold after last month’s narrow 5-4 decision to cut rates from what had been a 16-year high.
The decision came hours after the Federal Reserve cut US interest rates by half a percentage points in a move that reflected the Fed’s confidence that inflation pressures were cooling.
The Bank of England struck a more cautious tone on Thursday. Governor Andrew Bailey said cooling inflation pressure meant the Bank of England should be able to cut interest rates gradually over the months ahead.
“But it’s vital that inflation stays low, so we need to be careful not to cut too fast or by too much,” he said in a statement.
Investors think the British central bank will cut interest rates at a slower rate than the Fed over the next year, citing more persistent inflation pressure in the UK economy.
The Bank of England said annual consumer price inflation was likely to rise to about 2.5 per cent by year end from 2.2 per cent in the most recent data, compared with a previous forecast of about 2.75 per cent. Lower oil prices contributed to the reduced inflation forecast.
Ahead of Thursday’s decision, investors had priced in about five quarter-point reductions in bank rate by June 2025 – similar to the outlook for the European Central Bank, although the ECB has already reduced its rates twice this year. By contrast, they see about seven such cuts in the US, even after its outsized move on Wednesday.
Keenly anticipated by the bond market, the monetary policy committee voted 9-0 to maintain the pace of its quantitative tightening (QT) programme in the 12 months to October 2025.
Quantitative tightening represents the reversal of the purchase of hundreds of billions of pounds of British government bonds in past attempts to stimulate the economy. The process will see these bonds mature but also some active sales.
The £100 billion pace of tightening replicates the programme over the past year and was in line with market expectations.
Some investors had predicted an acceleration of QT as the Bank of England holds £87 billion of bonds that are due to mature naturally over the next year, leaving just £13 billion in active bond sales at the current pace.
Some legislators and think tanks have criticised QT as it crystallises forward losses sustained by the bank, which purchased its government bonds at prices much higher prices than their current value, and which are underwritten by the taxpayer.
The bank also makes losses on interest on the reserves it issued to finance the bond purchases which now far outstrips the returns generated by them.
Many economists think chancellor of the exchequer Rachel Reeves could change Britain’s fiscal rules to exclude the impact of the Bank of England’s QT programme in her inaugural budget, due on October 30th – something that could give her several billion pounds of extra fiscal space.
The Bank of England stuck to its view that the process was proceeding smoothly, with only a “modest” impact on the stance of monetary policy overall. It said QT was required to stop an upward ratcheting of its bond holdings and ensure it could act flexibly in future crises. – Additional reporting: Reuters