Bank of England Maintains Policy Rate as Core Inflation Remains Elevated

Introduction
The Bank of England kept its benchmark interest rate unchanged at 5.25 percent in its October 2025 meeting, extending a steady policy stance as inflation remains above the central bank’s two percent target. The Monetary Policy Committee (MPC) voted six to three to maintain the rate, citing continued strength in services inflation and wage growth despite signs of easing consumer demand. With the UK’s headline Consumer Price Index hovering around 3.1 percent and core inflation still near 4.3 percent, policymakers expressed caution about declaring victory over inflation. The decision reflects the Bank’s growing emphasis on data dependency and a balancing act between restraining price pressures and preventing excessive drag on economic activity.

Policy Insight
Governor Andrew Bailey emphasized that the Bank’s current focus is on the persistence of inflation rather than its peak. He noted that while energy costs have normalized and global supply disruptions have eased, domestic cost pressures remain stubborn, particularly in services and labor markets. The MPC’s report highlighted wage growth of around 5.6 percent year-on-year, signaling ongoing tightness in the job market even as vacancy numbers decline. The Bank’s economists expect inflation to return to target by late 2026, assuming no further external shocks. The BoE’s quarterly forecast shows GDP growth at just 0.4 percent for 2025, suggesting a period of stagnation rather than recession.

Market analysts had largely anticipated the hold. Futures pricing before the meeting suggested an 80 percent probability that the MPC would pause, reflecting expectations that the rate-hiking cycle that began in late 2021 has reached its terminal level. The committee reiterated its willingness to tighten policy again if inflation proves more persistent than projected. However, several members argued that the real policy rate is now restrictive enough to bring demand into better balance with supply.

Market Impact
Financial markets reacted moderately to the announcement. Sterling weakened slightly to 1.24 against the dollar, while gilt yields edged lower across medium-term maturities as investors interpreted the decision as a sign that the tightening phase is complete. The FTSE 100 index closed the day up 0.3 percent at 7,460, supported by strength in utility and consumer stocks that tend to benefit from stable rate conditions. Analysts at Bloomberg Economics noted that expectations for the first rate cut have shifted to mid-2026, compared with earlier bets on early spring.

Bank lending data showed that mortgage approvals rose modestly in September, reaching 45,000, the highest since March 2024. However, average mortgage rates on new two-year fixed deals remain above 6 percent, keeping affordability under pressure for first-time buyers. The stability of the policy rate offers some reassurance to households and businesses after two years of rapid monetary tightening. Yet, financial conditions remain tight compared with the pre-pandemic decade, when base rates hovered near historic lows.

City Response
Reactions across London’s financial sector were mixed. Several investment banks welcomed the pause as necessary for market stability, while others warned that maintaining high rates for too long risks damaging business confidence. The London Chamber of Commerce noted that small and medium-sized enterprises are facing higher refinancing costs and delayed investment decisions. Many firms have adopted a cautious stance, focusing on operational efficiency rather than expansion.

In the housing sector, estate agents report that buyer sentiment remains subdued. The combination of high mortgage rates and stagnant real incomes continues to weigh on transactions, particularly in outer London boroughs. Average house prices in the capital have fallen 2.3 percent over the past year according to the Office for National Statistics. Nevertheless, rental demand remains strong, pushing rents up by an average of 7.5 percent year-on-year, reflecting the persistent supply imbalance in urban housing.

The service sector, which accounts for nearly 80 percent of London’s GDP, shows contrasting trends. Financial services and professional consulting remain resilient, supported by international demand, while retail and hospitality continue to struggle with weaker discretionary spending. Employment data from ONS indicates that London’s jobless rate has edged up to 4.8 percent, but the city’s overall workforce participation remains higher than the national average, underscoring its structural labor resilience.

Policy Outlook
The Bank faces a challenging policy horizon. Global central banks, including the European Central Bank and the US Federal Reserve, are also signaling a pause, creating a synchronized plateau in global interest rates. The MPC must evaluate how long to maintain restrictive conditions without triggering a sharper downturn. Governor Bailey’s press statement emphasized that premature loosening would risk reigniting inflation expectations, which remain slightly above the long-term target according to market surveys.

Fiscal dynamics also complicate the picture. The government’s Autumn Statement is expected to outline modest tax incentives aimed at supporting productivity and investment in green technologies. However, fiscal space is limited by high public debt levels exceeding 96 percent of GDP. The interplay between fiscal restraint and monetary caution suggests that the UK economy will rely more on private investment and exports for growth. London’s position as a financial hub remains critical, particularly as capital markets adjust to post-Brexit regulatory alignment.

Outlook 2026
Looking ahead, analysts anticipate a gradual decline in inflation as supply chains stabilize and energy prices moderate further. The BoE projects CPI inflation to average 2.6 percent in 2026, while GDP growth could edge up to 1.2 percent if real incomes recover. For households, the cost-of-living squeeze may ease, though disposable incomes are unlikely to return to pre-2022 levels before late 2026. The property market could stabilize if borrowing costs start to decline in the second half of next year. For businesses, the coming year will test resilience amid constrained consumer spending and cautious credit conditions.

Financial institutions are closely watching the Bank’s balance sheet reduction program, which is expected to continue at a steady pace of around 100 billion pounds annually. Analysts suggest that quantitative tightening, combined with fiscal conservatism, will maintain upward pressure on long-term yields even if short-term rates remain stable. Investors are likely to favor sectors tied to infrastructure, energy transition, and digital services, which may see increased government support.

Conclusion
The Bank of England’s decision to maintain its policy rate underscores a delicate balancing act between controlling inflation and supporting fragile growth. While headline inflation is falling, the persistence of core price pressures justifies the MPC’s cautious stance. London’s economy, driven by finance, technology, and services, continues to adapt to tighter monetary conditions and evolving global dynamics. For policymakers, the key challenge remains timing the eventual shift toward normalization without jeopardizing the progress made against inflation. For businesses and households alike, stability in monetary policy may bring short-term relief but also signals an extended period of slower, more disciplined growth.