BoE holds rates in split decision while ECB remains on hold
Summary
The Bank of England (BoE) held rates at 4.0% today in a close 5-4 vote, with four members preferring a 25 basis point (bp) cut. Governor Andrew Bailey voted with the majority, noting that policy remains on a “gradual path downwards,” but emphasized the Monetary Policy Committee (MPC) still needs firmer evidence that inflation is on track toward its 2.0% target before easing further.
Newly expanded meeting minutes revealed that Governor Bailey was the only member among the five who voted for a hold to express hesitation, suggesting his stance could be decisive in determining whether the next move comes as early as December.
In contrast, the European Central Bank (ECB) left rates unchanged last week, maintaining a patient, data-driven approach as prior rate cuts continue to filter through the Eurozone economy. President Christine Lagarde reiterated that policy remains “in a good place,” citing inflation near target and a resilient growth backdrop, leaving the Governing Council in a more comfortable position.
Bank of England
Today’s meeting highlighted the Bank’s divided stance on the policy outlook, with several forecasters shifting from expecting a hold to calling for a cut following softer-than-expected September CPI data. Recent government indications of potential income tax increases to close a widening fiscal gap have also spurred speculation that lower borrowing costs may soon be needed to sustain demand.
The BoE’s latest Monetary Policy Report highlights that inflation risks are now more evenly balanced. CPI, which peaked at 3.8% in September, is expected to ease to around 2.5% in 2026 and reach the 2.0% target by 2027. These projections assume market pricing for rates to decline toward 3.5% by mid-2026.
Compared with September’s “gradual and careful approach,” today’s guidance, that the Bank Rate is likely to continue on a gradual downward path if disinflation continues, marks a subtle but notable shift. It underscores a cautious bias toward easing, even as the MPC reiterates its need for more data before moving again.
Source: Chatham Financial
European Central Bank
The ECB left its three key rates unchanged in October, as expected. President Christine Lagarde emphasised that the Governing Council views policy as “in a good place,” with inflation largely stable and the labour market showing continued strength, evidence that current settings remain appropriate.
Lagarde pointed to recent global developments, including the U.S.-EU trade accord, easing geopolitical tensions, and tariff reductions following the recent U.S.–China agreement, as factors mitigating downside risks to growth.
With inflation close to target and near-term growth risks easing, policymakers see little urgency to adjust rates further. Market pricing still implies only a modest probability of a 25 bp cut by mid-2026, reflecting investor caution around Eurozone growth, potential financial stress, or renewed euro strength.
Source: Chatham Financial
Moving forward
The BoE refrained from commenting on the government’s upcoming budget announcement, but with a projected shortfall of £30-40 billion, additional tax revenue will likely play a key role in fiscal consolidation. After several years of heavier corporate taxation, much of the adjustment could now fall to individual taxpayers.
Unless inflation surprises to the upside, Governor Bailey may ultimately be swayed by signs of slowing growth and a softening labour market, opening the door to a potential December rate cut.
Meanwhile, the ECB appears vindicated in having eased policy earlier and more decisively than peers. With inflation anchored and policy transmission still unfolding, officials are in no rush to change course. That said, the Governing Council remains vigilant, monitoring financial stability risks, particularly within equity valuations and private credit, where localised bubbles appear to be forming.
Disclaimers
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