Bank of England holds interest rate at 4% amid inflation concerns

The Bank of England (BoE) kept its key interest rate unchanged at 4% today, pausing after three consecutive cuts earlier this year. The Monetary Policy Committee (MPC) voted 7–2 in favour of holding rates, with two members pushing for a further reduction to 3.75%, signalling that additional easing remains possible before the end of 2025.

The decision comes against a backdrop of stubborn inflation. Official figures released yesterday showed UK consumer price inflation steady at 3.8% in August, with food prices still rising at a faster pace than the headline rate. Policymakers said they remain focused on returning inflation to the 2% target in the medium term.

Alongside its rate decision, the BoE also announced changes to its quantitative tightening programme. The Bank has been selling off government bonds accumulated during the financial crisis and the Covid-19 pandemic at a rate of £100 billion per year. That pace will now slow to £70 billion, with fewer long-dated government bonds set to be sold in future.

“Underlying disinflation has generally continued, although with greater progress in easing wage pressures than prices,” the MPC said in its September summary. “The timing and pace of future reductions in the restrictiveness of policy will depend on the extent to which underlying disinflationary pressures continue to ease.”

Economic growth in the UK remains subdued, with signs of slack in the labour market. Pay growth has begun to cool, but services inflation has remained sticky in recent months. The MPC warned that upside risks to inflation persist and said policy would remain “responsive to the accumulation of evidence.”

Business leaders say the decision leaves many SMEs facing continued uncertainty.

“Flat rates will be welcomed for now, but rising employer costs and uncertainty around November’s Budget could create a challenging backdrop for SMEs. If unaddressed, these factors risk holding back confidence if businesses are left guessing about the direction of travel.”

“The latest news from the Bank of England is likely to leave UK SMEs disappointed, though not entirely surprised, given last month’s persistently high inflation figures. Experts remain divided on how quickly the MPC might cut interest rates, with forecasts varying and growing uncertainty over whether there will be a further reduction this year.

“Business owners will be hoping momentum is heading in the right direction, and as rates fall, SMEs could benefit from lower borrowing costs, making previously shelved expansion plans more viable in the new year. Beyond tracking the shifting macroeconomic landscape, SMEs will also be keeping an eye on the upcoming Autumn Budget. Our latest research indicates that nearly a quarter (24%) of business leaders in the UK feel that SMEs are only a low priority for the government, highlighting that business owners want to see more action to support economic growth.”

The BoE’s announcement came just hours after the US Federal Reserve cut its own benchmark lending rate by 0.25 percentage points to a range of 4–4.25% – its first reduction this year.

With the next MPC vote scheduled for early November, attention will turn to whether cooling wage growth and slowing demand are enough to convince UK policymakers to resume rate cuts before the close of 2025.