The Bank of England left interest rates on hold at 4.75 per cent on Thursday after UK inflation rose for the second month in a row.
Bank of England governor Andrew Bailey said "a gradual approach to future interest rate cuts remains right, but with the heightened uncertainty in the economy we can't commit to when or by how much we will cut rates in the coming year".
Six members of the Monetary Policy Committee (MPC) voted in favour of keeping rates on hold, while three voted for a 25-basis point cut.
“The decision was never in doubt, but the manner in which it was reached has raised some eyebrows, and hopes, for 2025," said Peter Stimson at MPowered Mortgages. “The fact that a third of the Monetary Policy Committee voted for an immediate rate cut suggests that several of the BoE’s decision-makers are more concerned by underlying economic issues than the jump in consumer inflation revealed" on Wednesday.
The Office for National Statistics said the Consumer Prices Index rose by 2.6 per cent in the 12 months to November – up from 2.3 per cent in the previous month. The inflation rate is now at its highest since March. In September, inflation stood at 1.7 per cent, below the Bank of England's 2 per cent target.
"While the Bank of England left interest rates at 4.75 per cent today, it struck a slightly more dovish tone," said Ruth Gregory, deputy UK economist at Capital Economics. "This supports our view that the next 0.25 per cent rate cut will come in February and that the Bank will cut rates further and faster than investors expect, at alternative meetings until rates reach 3.5 per cent in early 2026."
Nonetheless, Susannah Streeter, head of money and markets, Hargreaves Lansdown, felt that inflation is "still behaving like a stubborn toddler, resisting attempts to coax it down from uncomfortable levels.”
Meanwhile, the Bank of England downgraded its expectation for fourth-quarter growth of the UK economy from 0.3 per cent to zero. For Anna Leach, chief economist of the Institute of Directors, there was "little doubt from reading their minutes that they see a link between the Budget and markedly weaker confidence and activity in the private sector".
Inflation woes
“Inflation rose again this month as prices of motor fuel and clothing increased this year but fell a year ago,” Grant Fitzner, the ONS's chief economist, said. “This was partially offset by airfares, which traditionally dip at this time of year, but saw their largest drop in November since records began at the start of the century.”
Airfares dropped 19.3 per cent in November, mainly because of falls in ticket prices on European routes, the ONS said.
Core CPI, which strips out energy, food, alcohol and tobacco, rose by 3.5 per cent, having been up 3.3 per cent in October. Meanwhile, the closely watched inflation reading in the services sector remained at 5 per cent, which many economists thought was the reason the majority of committee members voted to keep rates at 4.75 per cent.
Economists predicted rates will fall even more slowly than previously thought across 2025, given that the inflationary effects of some of the items in the recent budget will start to feed through to prices in the new year, not least payroll tax increases and a rise in the minimum wage.
“Price pressures are resurfacing again – with employers likely to start ramping up prices at the start of the year to account for the employer NICs (national insurance contributions) increase," said Sanjay Raja, chief UK economist at Deutsche Bank Research.
“Put bluntly, the MPC is some way away from declaring victory on inflation.”
'Fight against rising prices is far from over'
Monica George Michail, associate economist at the National Institute Economic Social Research, said inflation is forecast to increase further in early 2026 and that interest rates may “remain higher for longer than previously thought.”
“We think the Bank will remain cautious given elevated wage growth, global uncertainty around the Trump presidency, and inflationary pressures introduced in the latest budget,” she added.
Last week, the Organisation for Economic Co-operation and Development (OECD) forecasted UK inflation to average 2.8 per cent in 2025, and that the BoE would slowly reduce interest rates, eventually reaching 3.5 per cent in 2026.
“This latest inflation reading highlights that the fight against rising prices is far from over,” said Myron Jobson, senior personal finance analyst for Interactive Investor.
“Inflationary pressures stemming from measures announced in the budget, such as heavy borrowing, increased public spending, and uncertainties surrounding president-elect Donald Trump's tariff plans, mean the Bank of England cannot afford to rest easy.”
