The Bank of England (BoE) Monetary Policy Committee (MPC) has decided at its meeting on 18 September 2025 to hold the bank rate at 4%, while slowing its programme of ‘quantitative tightening’ (QT).
The decision was widely expected by markets and analysts, given the mixed recent economic data from the UK economy on inflation and GDP growth.
Key to the decision was that inflation, though easing from its peaks, remains well above the BoE’s 2% target. Core inflation – that is, inflation excluding volatile items such as energy and food – and services inflation continue to stay persistently higher than comfortable for rate setters, partly driven by wage pressures and past cost shocks.
The MPC also noted that economic growth remains subdued, with recent data indicating meagre GDP growth and signs of slack in the labour market. While unemployment has not spiked, there are indications that spare capacity in the economy is gradually rising.
The MPC judged holding rates steady balances the risk of inflation remaining too high against the risk of choking off growth if rates were cut too soon.
UK Economic Travails
Several factors are feeding into the BoE’s reasoning. Inflation in August stood at 3.8%, nearly twice the MPC’s target. Earnings growth remains high, though slowing somewhat, while many households are still experiencing significant increases in costs for energy, food and housing.
The Bank is also paying attention to Government fiscal policy, particularly how its spending, tax changes, minimum wage increases and other labour market policies feed through to inflation.
Another key tool under observation is quantitative tightening (QT), essentially selling Government bonds or ‘gilts’ to reduce the BoE’s holdings. The pace of QT has been slowed compared to earlier plans, in order to reduce instability in bond markets. The BoE has cut its annual planned sale from £100 billion to £70 billion.
November Government Budget
With the base rate on hold, Chancellor Rachel Reeves faces ongoing constraints as she prepares her second Budget in November. Holding the rate steady suggests the Bank is wary of fiscal decisions such as tax hikes and labour market changes that could reignite inflation – which is what caused the current spike in price rises.
In the Budget, the Government may need to consider whether new spending promises or tax cuts are affordable, given the need to maintain credibility with investors in the bond market. Tight public finances, debt servicing costs and the risk that too generous fiscal policy could force the MPC to keep interest rates higher for longer are likely to feature in the Chancellor’s thinking.
The timing is important. If the Budget includes measures that increase spending or reduce tax revenues without matching savings elsewhere, it could upset the MPC’s inflation forecasts and make future rate cuts less likely.
Implications for Personal Finances
Inflation is likely to continue as the biggest concern for households. Although it is forecast to fall from its current rate, the path down to 2% inflation will still take time. Rising prices erode purchasing power, especially for those with fixed incomes or whose wage increases lag behind inflation.
Average real-terms wage growth remains relatively strong but is coming under pressure. If wages climb too quickly, it can feed back into inflation (for example, through higher labour costs in services). On the other hand, if wage growth falls behind price rises, it will harm household living standards over time.
The BoE’s decision to hold the base rate reflects concerns about persistent inflation, sluggish growth and labour market pressures. The Government’s November Budget will need to tread carefully to avoid undermining the disinflation process.
Weak economic growth means fewer job opportunities, more cautious investment and lower prospects for pay rises. Households face tighter budgets. Borrowing costs for mortgages, loans or credit depend on the bank rate and persist higher for longer. Savers may benefit somewhat, but inflation at its current level is likely eating into real returns.
For those considering their long-term plans, this can present particular issues, with the ongoing difficult economic climate and uncertainty surrounding upcoming Government fiscal announcements and possible new tax liabilities. But it is important to remember not to take rash decisions in light of these events.
For families with long-term financial goals, a financial planner can help by reviewing budgets, debts and savings in light of inflation and interest rates. They can advise on how best to preserve the value of long-term savings and investments, or how to prepare for any tax or spending changes that may be introduced in the November Budget.
This is essential to provide reassurance and clarity at a time of economic uncertainty. The combined pressures of inflation, interest rates and modest wage growth mean it is wise to take stock of one’s finances and seek financial planning help if needed.