The Bank of England is anticipated to cut interest rates by a quarter-point once more this year, followed by another reduction in early 2026, according to a majority of economists surveyed in a Reuters poll. This forecast comes as a resilient economy continues to generate persistent inflation.
Earlier this month, the central bank made a notable adjustment by lowering the Bank Rate by 25 basis points to 4.00 per cent after a rare second round of voting, resulting in a 5-4 split within the Monetary Policy Committee (MPC). Governor Andrew Bailey emphasised the need for caution, stating that easing should not occur “too quickly or by too much.”
In June, an unexpected inflation surge to 3.6 per cent prompted the Bank of England to adjust its predictions, expecting inflation to peak at 4.0 per cent this quarter. The inflation rate further increased to 3.7 per cent in July, significantly above the Bank’s target of 2.0 per cent.
Despite these fluctuations, most economists remain steadfast in their predictions, with 50 out of 62 polled between August 13-19 forecasting another quarter-point cut by the end of the year, likely during the November meeting that aligns with the Bank’s own forecasting round. Only nine economists believe the central bank will maintain its current rate.
The interest rate futures market is already pricing in the next cut to occur in early 2026. Chris Hare, senior economist at HSBC, noted, “Right now the Bank of England is really on a knife-edge in terms of whether it wants to cut interest rates further. We think the disinflationary momentum, particularly in the wage data, will be just about enough to tip the MPC into cutting rates in November.”
However, he also cautioned about the potential for elevated inflation expectations, stating, “The risk is we do ultimately get 4 per cent inflation, coupled with the risk wage growth doesn’t ease back in the way we expect.”
Recent official data revealed that average weekly earnings, excluding bonuses, grew by 5 per cent in the three months up to June. The Bank of England considers a 3 per cent growth rate as compatible with its 2 per cent inflation target.
Britain’s economy has surprised many by defying expectations of a slowdown, showcasing a 0.3 per cent expansion in the last quarter, outperforming its G7 counterparts for the first half of the year. Current forecasts indicate steady growth of 1.1 per cent for this year and 1.2 per cent in 2026, maintaining a pace similar to last year.
Elliott Jordan-Doak, senior UK economist at Pantheon Macroeconomics, remarked, “What we’re learning about the economy is that it has an underlying degree of resilience that people had not anticipated, and ultimately that feeds into our rates call as well.” He expects the Bank of England to hold rates steady until the end of next year.
While a majority of 59 economists foresee another quarter-point cut in early 2026, there remains a lack of consensus regarding the rate trajectory throughout next year, with differing opinions on the number of cuts that may occur. Jordan-Doak added, “We think the neutral rate is higher, referring to the rate that neither stimulates nor restricts the economy. This means only a couple of rate cuts even in a worst-case scenario.”
