Bank of England interest rate outlook: expected to remain unchanged on September 18, interest rate cut expectations divergence intensified

According to a Reuters poll from September 8 to 11, 67 economists unanimously expect the Bank of England (BoE) to keep its base rate unchanged at 4.00% on September 18. However, market views are sharply divided on the path of future rate cuts. Most economists (42) expect the BoE to cut rates by 25 basis points in the fourth quarter, with a few (3) forecasting a 50 basis point cut. But more than 30% (22) of respondents believe rates will remain unchanged for the rest of the year, a significant increase from 15% in the August survey, reflecting market concerns about persistently high inflation.

Inflation in the UK fell back to the central bank's 2 per cent target last year after peaking above 11 per cent in 2022, but has recently risen to almost 4 per cent. It is expected to reach 4 per cent in September and could remain high until mid-2027 before returning to target. Andrew Bailey, governor of the Bank of England, said recently that the pace of rate cuts was unclear given inflationary pressures and economic uncertainty.

Economic data and market expectations

Average weekly earnings excluding bonuses rose 5 percent in the three months to June, the latest official data showed, and inflation stood at 3.8 percent in July. Reuters forecasts inflation will average 3.8 percent in the current quarter and 3.6 percent in the next quarter, remaining high at 3.4 percent for the full year and falling to 2.5 percent in 2026.

August labour and inflation data, due on September 16 and 17 respectively, will be crucial to the tone of the November meeting. James Rossiter, global head of macro strategy at TD Securities, said: "Next week's inflation data will determine whether to cut rates in November and whether the Bank of England adjusts its language to signal a slower pace of rate cuts."

Although the UK has performed well in the G7 this year, with annual growth expected to be 1.3%, this is mainly due to government spending, and private demand remains subdued. The economy is expected to grow by 0.2-0% quarter-on-quarter in 2026, with annual growth falling to 1.2%, down from 1.4% in 2024. The squeeze on real household incomes from high inflation and restrictive interest rates continue to dampen private sector demand.

The Bank of England expanded its balance sheet to 875 billion pounds (about $1.20 trillion) by buying government bonds during the global financial crisis and epidemic. Since 2022, the central bank has reduced its bond holdings to 558 billion pounds.

According to a Reuters poll, 12 economists expect the Bank of England to further reduce its bond holdings between October 2025 and September 2026, with a median forecast of 67.50 billion pounds, a range of 50 billion to 100 billion pounds.

Analysts' opinion: Interest rate cut path controversy intensifies

Victoria Clarke, chief UK economist at Santander CIB, said: "Inflation at twice the central bank's target is nowhere near sufficient to justify a rate cut and there are upside risks to inflation expectations." The bank has adjusted its forecasts to suggest the BoE may have completed its current rate-cutting cycle. Mr. Clarke warned that persistently high inflation could force the central bank to maintain restrictive policies for longer.

The BoE faces the twin challenges of inflation and economic growth. Market expectations for the September 18 interest rate decision were broadly unchanged, but the likelihood of a rate cut in November fell on the latest data. Jens Eisenschmidt, chief European economist at Morgan Stanley, said the BoE could delay a rate cut until early 2026 if September inflation data unexpectedly rose or the labour market improved significantly. "Inflation in the UK is much more sticky than expected, with services inflation being particularly stubborn, which could force the central bank to take a more cautious approach," he said.

The Bank of England is caught in a dilemma: high inflation limits the scope for rate cuts, but a slowing economy and a weak labour market justify easing. Simon Wells, chief economist at HSBC, said: "The central bank could cut rates by 25 basis points in November, but only if inflation data do not worsen." He added that a shrinking BoE balance sheet could further tighten financial conditions, indirectly affecting the pace of rate cuts.

The Bank of England's September 18 meeting statement and economic forecast update will be the focus of the market. Lucy Baldwin, global macro strategist at UBS, predicted: "Even if interest rates remain unchanged in September, the central bank may use language to suggest the possibility of a rate cut in November, but only if inflation and wage growth data support accommodative policy." She noted that geopolitical risks and global economic uncertainty could further boost demand for safe-haven assets, indirectly supporting the pound and gilts.

Fabrice Montagne, economist at Barclays, believes the BoE could pause interest rate cuts until Quarter 1 2025 to assess inflation trends and the impact of fiscal policy. "The sustainability of government spending is in doubt, weak private demand could weigh on growth in 2026, and the central bank needs more data to confirm the downward trend in inflation," he said.

Comprehensive analysis and outlook

Expectations of the Bank of England leaving interest rates unchanged on September 18 are almost on the DingTalk board, but the outlook for a fourth-quarter rate cut has been exacerbated by high inflation and uncertainty over economic data. Markets will be closely watching the September 16-17 labour and inflation data, as well as the wording of the central bank's meeting and economic forecasts.

In the longer term, inflation is not expected to return to the 2% target until 2027, and restrictive interest rates and balance sheet shrinkage are likely to continue to depress private demand. Global macro conditions, geopolitical risks, and Fed policy will also indirectly affect the Bank of England's decision-making path.

Investors should keep an eye on the Bank of England's latest assessment of inflation and growth, and whether to signal a rate cut in November. If inflation data rises more than expected, the central bank may further delay easing policy, and sterling and gilt yields may rise in the short term. Conversely, if the labor market continues to weaken and inflation falls back, the probability of a rate cut in November will increase significantly, and safe-haven assets such as gold may further benefit.