The Bank of England has held interest rates at 4% after a narrow 5–4 vote, with policymakers signalling caution as the government prepares for the Budget later this month.
The Bank said it believes inflation has peaked, but the tight vote reflected continued uncertainty surrounding the UK’s economic outlook.
Governor Andrew Bailey reiterated that the Bank would “prefer to wait and see” whether inflation continues to ease before considering further rate cuts. His remarks come as financial markets question the impact of the government’s forthcoming tax and spending decisions.
Pressure Builds as Reeves Refuses to Rule Out Tax Rises
Speculation has intensified that Chancellor Rachel Reeves may raise income tax, National Insurance or VAT at the 26 November Budget, moves that would break Labour’s central manifesto pledge.
Reeves has repeatedly declined to rule out increases, fuelling business concerns over the direction of fiscal policy at a time when households and firms are already facing higher borrowing costs.
Despite inflation still running at 3.8%, nearly double the Bank’s target, Reeves highlighted the Bank’s forecast, saying it “shows that inflation is due to fall faster than previously predicted”. She added: “At the Budget later this month I will take the fair choices that are necessary to build the strong foundations for our economy…”
However, critics argue the Chancellor’s tax stance risks undermining confidence. Shadow chancellor Mel Stride said interest rates were “staying higher for longer because Rachel Reeves does not have a plan or a backbone”. He claimed:
“The UK has the highest inflation in the G7 thanks to Rachel Reeves’ Jobs Tax and reckless borrowing spree. And yet she is once again preparing to hike taxes, leaving us trapped in a doom-loop.”
Weak Consumer Confidence and Stagnant Growth Indicators
The Bank’s latest update reported “no sign of increasing consumer confidence”, with households remaining cautious and prioritising savings. Retailers continue to face subdued demand, and while supermarkets are seeing higher food sales by value, the Bank noted that volumes are flat and inflation-driven.
Labour continues to say it has placed economic growth at the centre of its pitch to voters, but the Bank’s projections show a muted outlook: 1.5% this year and falling to 1.2% next year. Rising childcare costs and caring responsibilities have also pushed some workers to reduce hours or “even stop working”, according to the report.
Labour Faces a Difficult Balancing Act
The Bank warned that wage growth and service sector inflation must fall further before it can be “confident that inflation will fall back to the 2% target”. Analysts say this places additional pressure on Reeves, whose Budget choices could either support the Bank’s attempt to control inflation—or complicate it.
KPMG UK’s chief economist Yael Selfin said the close vote “underscores the uncertain backdrop policymakers are navigating ahead of the Budget”. She added that the Bank’s stance suggests “the door remains open for a rate cut at the December meeting”, depending on how fiscal policy evolves.
Paul Dales of Capital Economics described the decision as “a pause in the downward trend in interest rates rather than the end”, but noted that the Bank will weigh the Budget heavily before proceeding.
A Risk of Labour Undermining Economic Stability?
The theory behind higher interest rates is to suppress demand and cool inflation. But the Bank also acknowledged that high rates risk weakening investment and harming job creation—issues that could be exacerbated if tax rises further squeeze household budgets.
With unemployment expected to rise to 5% by the end of the year and remain elevated until 2028, the timing and scale of any tax increases will be politically and economically sensitive.
The Bank’s decision leaves Labour facing heightened scrutiny, as businesses, economists and political opponents increasingly question whether the Chancellor’s upcoming Budget will steady the economy or unsettle it further.
Main Image: View of the Bank of England building in July 2022. Credit: acediscovery. Creative Commons Attribution 4.0 International license.
