Bank of England interest rate outlook: expected to remain unchanged on September 18, rate cut expectations diverge
2025-09-16 02:15:21
According to a Reuters poll conducted from September 8 to 11, 67 economists unanimously predicted that the Bank of England (BoE) would maintain its benchmark interest rate at 4.00% on September 18. However, market views were sharply divided on the path of future rate cuts. A majority of economists (42) expected the BoE to cut interest rates by 25 basis points in the fourth quarter, while a minority (3) predicted a 50 basis point cut. However, over 30% (22) of respondents believed that interest rates would remain unchanged for the rest of the year, a significant increase from 15% in the August survey, reflecting market concerns about persistently high inflation.
After peaking at over 11% in 2022, the UK's inflation rate briefly fell back to the Bank of England's 2% target last year, but has recently risen to nearly 4%. Inflation is expected to reach 4% in September and may remain high until mid-2027 before returning to target. Bank of England Governor Andrew Bailey recently stated that the pace of interest rate cuts remains unclear due to inflationary pressures and economic uncertainty.
Economic data and market expectations
The latest official data showed that average weekly earnings excluding bonuses rose 5% in the three months to June, with inflation at 3.8% in July. Reuters forecasts that inflation will average 3.8% this quarter and 3.6% next quarter, remaining high at 3.4% for the full year before falling to 2.5% in 2026.
August labor and inflation data will be released on September 16 and 17, respectively, and these data will be crucial to the tone of the November meeting. James Rossiter, head of global macro strategy at TD Securities, said: "Next week's inflation data will determine whether there is a rate cut in November and whether the Bank of England adjusts its wording to indicate a slower pace of rate cuts."
While the UK is expected to outperform the G7 this year, with annual growth projected at 1.3%, this is largely due to government spending, as private demand remains subdued. The economy is projected to expand by 0.2-0.4% quarter-on-quarter in 2026, with annual growth falling to 1.2%, down from 1.4% in 2024. High inflation, which is squeezing real household incomes, and restrictive interest rates continue to dampen private sector demand.
The Bank of England, which expanded its balance sheet to 875 billion pounds ($1.2 trillion) by buying government bonds during the global financial crisis and the pandemic, has reduced its bond holdings to 558 billion pounds since 2022.
A Reuters poll of 12 economists expected the Bank of England to reduce its bond holdings further between October 2025 and September 2026, with a median forecast of 67.5 billion pounds and a range of 50 billion to 100 billion pounds.
Analysts' view: Controversy over the path of interest rate cuts intensifies
"Inflation running at twice the Bank of England's target is nowhere near sufficient to justify a rate cut, and there are upside risks to inflation expectations," said Victoria Clarke, chief UK economist at Santander CIB. The bank has adjusted its forecasts to suggest the Bank of England may have completed its current rate-cutting cycle. Clarke warned that persistently high inflation could force the Bank of England to maintain restrictive policies for longer.
The Bank of England faces the dual challenges of inflation and economic growth. While market expectations for the September 18th interest rate decision remain unchanged, the likelihood of a November rate cut has decreased due to the latest data. Jens Eisenschmidt, chief European economist at Morgan Stanley, said that if September inflation unexpectedly rises or the labor market improves significantly, the Bank of England may delay a rate cut until early 2026. He noted, "UK inflation has been far more sticky than expected, with services sector inflation being particularly stubborn, which may force the central bank to adopt a more cautious approach."
The Bank of England faces a dilemma: high inflation limits its scope for rate cuts, but a slowing economy and a weak labor market justify easing policy. HSBC Chief Economist Simon Wells said, "A 25 basis point rate cut in November is possible, but only if inflation data does not deteriorate further." He added that the reduction in the Bank of England's balance sheet could further tighten financial conditions, indirectly affecting the pace of rate cuts.
The Bank of England's statement and updated economic forecasts on September 18th will be a key market focus. Lucy Baldwin, global macro strategist at UBS, predicts: "Even if interest rates remain unchanged in September, the Bank of England may hint at a November rate cut through its language, but only if inflation and wage growth data support an easing policy." She notes that geopolitical risks and global economic uncertainty could further boost demand for safe-haven assets, indirectly supporting the British pound and UK government bonds.
Barclays economist Fabrice Montagne believes the Bank of England may pause its interest rate cuts until the first quarter of 2025 to assess inflation trends and the impact of fiscal policy. He said: "The sustainability of government spending is in doubt, and weak private sector demand is likely to drag down growth in 2026. The central bank needs more data to confirm the downward trend in inflation."
Comprehensive Analysis and Outlook
The Bank of England is almost certain to keep interest rates unchanged on September 18, but the outlook for a rate cut in the fourth quarter has become increasingly divided due to high inflation and uncertainty in economic data. The market will closely monitor labor and inflation data on September 16-17, as well as the language and economic forecasts of the Bank of England's meeting.
In the long term, inflation is not expected to return to the 2% target until 2027, and restrictive interest rates and balance sheet reduction are likely to continue to suppress private demand. The global macroeconomic environment, geopolitical risks, and Federal Reserve policy will also indirectly influence the Bank of England's decision-making path.
Investors should monitor the Bank of England's latest assessment of inflation and growth, and whether it signals a November rate cut. If inflation data exceeds expectations, the Bank of England may further postpone its easing policy, potentially leading to a short-term rise in the British pound and UK government bond yields. Conversely, if labor market weakness persists and inflation declines, the probability of a November rate cut will increase significantly, potentially benefiting safe-haven assets like gold.
After peaking at over 11% in 2022, the UK's inflation rate briefly fell back to the Bank of England's 2% target last year, but has recently risen to nearly 4%. Inflation is expected to reach 4% in September and may remain high until mid-2027 before returning to target. Bank of England Governor Andrew Bailey recently stated that the pace of interest rate cuts remains unclear due to inflationary pressures and economic uncertainty.
Economic data and market expectations
The latest official data showed that average weekly earnings excluding bonuses rose 5% in the three months to June, with inflation at 3.8% in July. Reuters forecasts that inflation will average 3.8% this quarter and 3.6% next quarter, remaining high at 3.4% for the full year before falling to 2.5% in 2026.
August labor and inflation data will be released on September 16 and 17, respectively, and these data will be crucial to the tone of the November meeting. James Rossiter, head of global macro strategy at TD Securities, said: "Next week's inflation data will determine whether there is a rate cut in November and whether the Bank of England adjusts its wording to indicate a slower pace of rate cuts."
While the UK is expected to outperform the G7 this year, with annual growth projected at 1.3%, this is largely due to government spending, as private demand remains subdued. The economy is projected to expand by 0.2-0.4% quarter-on-quarter in 2026, with annual growth falling to 1.2%, down from 1.4% in 2024. High inflation, which is squeezing real household incomes, and restrictive interest rates continue to dampen private sector demand.
The Bank of England, which expanded its balance sheet to 875 billion pounds ($1.2 trillion) by buying government bonds during the global financial crisis and the pandemic, has reduced its bond holdings to 558 billion pounds since 2022.
A Reuters poll of 12 economists expected the Bank of England to reduce its bond holdings further between October 2025 and September 2026, with a median forecast of 67.5 billion pounds and a range of 50 billion to 100 billion pounds.
Analysts' view: Controversy over the path of interest rate cuts intensifies
"Inflation running at twice the Bank of England's target is nowhere near sufficient to justify a rate cut, and there are upside risks to inflation expectations," said Victoria Clarke, chief UK economist at Santander CIB. The bank has adjusted its forecasts to suggest the Bank of England may have completed its current rate-cutting cycle. Clarke warned that persistently high inflation could force the Bank of England to maintain restrictive policies for longer.
The Bank of England faces the dual challenges of inflation and economic growth. While market expectations for the September 18th interest rate decision remain unchanged, the likelihood of a November rate cut has decreased due to the latest data. Jens Eisenschmidt, chief European economist at Morgan Stanley, said that if September inflation unexpectedly rises or the labor market improves significantly, the Bank of England may delay a rate cut until early 2026. He noted, "UK inflation has been far more sticky than expected, with services sector inflation being particularly stubborn, which may force the central bank to adopt a more cautious approach."
The Bank of England faces a dilemma: high inflation limits its scope for rate cuts, but a slowing economy and a weak labor market justify easing policy. HSBC Chief Economist Simon Wells said, "A 25 basis point rate cut in November is possible, but only if inflation data does not deteriorate further." He added that the reduction in the Bank of England's balance sheet could further tighten financial conditions, indirectly affecting the pace of rate cuts.
The Bank of England's statement and updated economic forecasts on September 18th will be a key market focus. Lucy Baldwin, global macro strategist at UBS, predicts: "Even if interest rates remain unchanged in September, the Bank of England may hint at a November rate cut through its language, but only if inflation and wage growth data support an easing policy." She notes that geopolitical risks and global economic uncertainty could further boost demand for safe-haven assets, indirectly supporting the British pound and UK government bonds.
Barclays economist Fabrice Montagne believes the Bank of England may pause its interest rate cuts until the first quarter of 2025 to assess inflation trends and the impact of fiscal policy. He said: "The sustainability of government spending is in doubt, and weak private sector demand is likely to drag down growth in 2026. The central bank needs more data to confirm the downward trend in inflation."
Comprehensive Analysis and Outlook
The Bank of England is almost certain to keep interest rates unchanged on September 18, but the outlook for a rate cut in the fourth quarter has become increasingly divided due to high inflation and uncertainty in economic data. The market will closely monitor labor and inflation data on September 16-17, as well as the language and economic forecasts of the Bank of England's meeting.
In the long term, inflation is not expected to return to the 2% target until 2027, and restrictive interest rates and balance sheet reduction are likely to continue to suppress private demand. The global macroeconomic environment, geopolitical risks, and Federal Reserve policy will also indirectly influence the Bank of England's decision-making path.
Investors should monitor the Bank of England's latest assessment of inflation and growth, and whether it signals a November rate cut. If inflation data exceeds expectations, the Bank of England may further postpone its easing policy, potentially leading to a short-term rise in the British pound and UK government bond yields. Conversely, if labor market weakness persists and inflation declines, the probability of a November rate cut will increase significantly, potentially benefiting safe-haven assets like gold.
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