Interest rates in the United Kingdom were held at four per cent in a tight vote as the Bank of England (BoE) said it judged inflation to have peaked.

Policymakers voted 5-4 in favour of leaving rates unchanged, saying borrowing costs are “likely to continue on a gradual downward path.”

BoE Governor Andrew Bailey explains that rather than cutting interest rates now, he would “prefer to wait and see” if price rises continued to ease this year. The BoE’s decision comes ahead of the government’s budget on November 26, where speculation has grown that Chancellor Rachel Reeves will raise taxes.

The chancellor has not ruled out raising income tax, National Insurance or VAT – a move that would breach the Labour Party’s main manifesto pledge.

Reacting to the bank’s latest decision, Reeves cites the latest forecast, which “shows that inflation is due to fall faster than previously predicted.”

According to her, “At the budget later this month I will take the fair choices that are necessary to build the strong foundations for our economy so we can continue to cut waiting lists, cut the national debt and cut the cost of living.”

However, Shadow Chancellor Mel Stride, is singing a different tune, arguing that interest rates were “staying higher for longer because Rachel Reeves does not have a plan or a backbone….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.” 

Inflation nearly doubles target

Inflation, the rate at which prices rise, currently stands at 3.8 per cent, nearly double the BoE’s target of two per cent. A drop in the rate of inflation does not mean that prices are falling, but that prices are rising at a slower rate. Despite judging inflation to have peaked, Bailey told the BBC that the BoE needed to “see more evidence” that inflation was slowing before rates could be reduced.

“We’ve had one inflation number, the most recent one, which has come in a bit under what we thought it would be and that’s good news, but I do want to see a bit more evidence than one number,” he declares noting the bank’s evidence suggested in its quarterly update on the UK economy that there was “no sign of increasing consumer confidence…Consumers remain cautious, focused on value, and prefer saving to overspending.” 

The BoE expects food price inflation to remain higher this year before slowing in 2026, citing higher global agricultural prices, as households continue to change their shopping habits to reduce spending, such as buying more vegetables and reducing meat consumption.”

Evidence in the Central Bank’s report revealed businesses were taking a “cautious approach to hiring, owing to high labour costs” with National Insurance costs being raised in April.

The BoE reports that uncertainty surrounding tax and spending decisions at the budget was a “concern” for businesses, with investment intentions “subdued” with the forecast that the unemployment rate would hit five per cent in the final three months of the year and remain around that level until 2028.

However, job seekers told bank officials there was “stiff competition” for roles with them positing that despite “tepid real-wage growth, many choose to prioritise job security over pay, given the current uncertain environment”.

The BoE, which is independent of the government, sets interest rates in an attempt to try to keep consumer price rises under control. Its base rate has an impact on the cost of borrowing for individuals and businesses, including mortgages, and also on returns on savings.