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Policymakers keep borrowing costs at 4% and warn of persistent weak growth before crucial budget

The Bank of England has kept interest rates on hold at 4% as it warned unemployment was rising and growth remains weak as Rachel Reeves prepares for her make-or-break budget.

With less than three weeks before the chancellor’s highly anticipated tax and spending measures, the Bank’s monetary policy committee (MPC) voted by a narrow five-four majority to keep borrowing costs unchanged for a second consecutive meeting.

Holding the casting vote in a finely balanced decision, Andrew Bailey, the Bank’s governor, said that he wanted to “wait and see” whether inflationary pressures in the British economy would continue to fade and if Reeves’s budget would have an impact.

“We held interest rates at 4% today. We still think rates are on a gradual path downwards, but we need to be sure that inflation is on track to return to our 2% target before we cut them again,” he said.

Borrowing costs have been cut five times since Labour came to power in July 2024, easing pressure on households and businesses, with the last reduction made in August. Meanwhile, inflation is running at 3.8% – almost twice the Bank’s 2% target.

In her 26 November fiscal statement the chancellor is expected to increase taxes, potentially slowing the economy, alongside measures taking action against the rising cost of living.

The decision to hold matched economists expectations, with financial markets putting the odds of a reduction in borrowing costs at below 30%.

However, the close hold decision and updated gloomy forecasts from the Bank’s policymakers are likely to fuel expectations for a December rate cut after the rate setters have had the chance to digest Reeves’s budget.

Expressing growing concern over the strength of the economy, the Bank said unemployment was on track to climb to a higher peak above 5% early next year amid subdued hiring demand.

It said inflation was likely to have already peaked at 3.8%, below its previous prediction for an increase to about 4% this autumn, and was set to fall back to about 2.5% next year before returning to its 2% target over the course of 2027.

Threadneedle Street warned that speculation over Reeves’s budget had probably contributed to weakness in the economy in recent months, and that households had also kept a lid on spending amid heightened pressures on living costs. It also found weaker exports to the US and disruption to Britain’s manufacturing base linked to the Jaguar Land Rover cyber-attack had pulled down output in the third quarter, forecasting a weaker growth rate of 0.2%.

However, policymakers signalled they remained concerned that inflationary pressures could continue to weigh on households and businesses.

While most of the MPC said it was a risk that current high rates of inflation might encourage workers and firms to drive up their wage expectations and put up prices, the Bank said the risks were becoming tilted to the downside.

Signalling readiness to take action in the coming months, Bailey explained in the MPC minutes: “Upside risks to inflation have become less pressing since August, and I see further policy easing to come if disinflation becomes more clearly established in the period ahead.”