The Bank of England (BoE) is set to maintain a tighter grip on interest rates for longer as the battle against inflation rumbles. Price pressures across the economy are proving more enduring than anticipated, Deputy Governor Clare Lombardelli told lawmakers on Wednesday.
Her comments indicated that the bank has little room to reduce borrowing costs further without risking another spike in inflation. Lombardelli’s remarks were echoed by Governor Andrew Bailey, who also reiterated that the central bank is not expected to soon follow up with another cut this year. He said financial markets had “got” the bank’s warning that the cuts would now be slower than many had hoped.
The warning marks a sharp change of tone from just weeks ago, when the bank cut its base rate to 4.0% in August, at the end of a difficult 5-4 split vote on the Monetary Policy Committee (MPC). The cut was intended to bolster business activity amid signs that the economy’s growth and hiring were slowing. But inflation data has since surprised to the upside, which has caused policymakers to snap to attention.
Instead of following through on standard quarterly cuts, as investors anticipated earlier this summer, the BoE indicates that rates may not rise from their current level until deep into 2026. The shift underscores the central bank’s predicament: While inflation has plummeted from the double digits in 2022, it remains above the target and shows signs of sticking, especially in sectors like food, energy, and services.
Markets adjust to slower cuts
Speaking to Parliament’s Treasury Committee, Gov. Bailey claimed his “message has landed” in financial markets. He reiterated that the path for rates remained lower but would be gradual. Bailey has told MPs there is now much greater uncertainty about how far and fast the Bank might go next.
Traders have pared expectations for a further cut in 2025. Futures markets already price in the first move in early 2026, probably in April. That is a dramatic change from earlier summer, when bets were in place on at least one more cut this year.
Bailey flagged lingering risks around inflation and the labor market. He said the “risk of inflation has gone up,” though he remains more concerned than some colleagues about softening employment trends.
Lombardelli doubled down on that cautious view. She warned lawmakers that the current 4% rate could already be near the neutral level, below which inflation could pick up anew from a tighter labor market and other influences.
Inflation continues to run well above the bank’s 2% target. It climbed to 3.8% in July, and is projected to surpass 4% in September. Lombardelli cautioned that elevated food and energy prices fueled inflation and influenced consumer views of future price increases.
In her written testimony, she said there were signs that the disinflationary process was losing steam, raising the risk of more prolonged inflation. Monetary policy, she said, may not even be significantly restrictive and, in a hint that she might not follow the central bank to further cuts, observed that history suggests the neutral rate could be at the high end of the 2–4% range.
Committee splits over next move
The MPC remains split. External member Megan Greene, a hawkish voice, supported Lombardelli’s fears over sticky inflation. Dovish rate-setter Alan Taylor, in contrast, cautioned that the bigger risk is recession. And slow adjustments, he said, threaten to create economic weakness that feeds on itself.
Taylor also told lawmakers that the current moment is unusually dangerous and cautioned that if recessionary momentum gathers, it could become much more difficult to end, based on history.
The bank says there is no change in rates for now, and signals they will be held at 4% until at least the end of the year. And markets, businesses, and households are bracing for a long, higher-interest-rate slog.
The debate within the MPC reflects the currents and cross-currents rippling through the economy: cut too early and you risk reigniting inflation; hold back for too long and you could deepen a slowdown.
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