A View from the Bridge - November 2025

We will never know if the Chancellor’s unprecedented pre-budget speech earlier this week was also an attempt to coax the BOE into an earlier rate cut, but Governor Andrew Bailey didn’t take the bait and was the casting vote to hold rates at 4% rather than lower them to 3.75%. We should not be surprised that the Bank opted for prudence until it can digest the details of the budget, irrespective of the telegraphing (or “waffle bombing”) of possible tax hikes. This was the first meeting where the views of each MPC member were published in the minutes, representing one of the changes in communication strategy following last year’s Bernanke review. Each member explains their position relative to the BOE staff’s baseline forecast, but naturally Bailey’s opinion holds most sway given his casting vote. In summary Baliey said “In assessing the outlook, I find the mechanisms underlying upside risks [to growth and inflation] less convincing than those underlying the downside… The downside scenario seems more likely… I would prefer to wait and see if the durability in disinflation is confirmed in upcoming economic developments this year”.

It is clear though that a chasm has opened between those members squarely focused on the 2% inflation target and surveyed inflation expectations (Pill, Lombardelli, Green and Mann) and those members more concerned about the deteriorating demand outlook now that inflation is on a gradual downward path (Dhingra, Taylor, Ramsden and Breeden). A key signal we follow closely is inflation expectations via inflation swaps and index-linked gilts, these have continued to fall despite the easing of policy rates implied by the interest rate curve. This suggests the market is siding with the doves on the committee believing that lower policy rates are needed to prevent inflation falling more quickly at the forward horizon.

Since the last meeting on September 18^th, inflation has surprised to the downside whilst growth and labour indicators have remained moribund. Nonetheless, inflation remains 1.8% above its 2% target and the governor is probably happy that market pricing has continued to ease policy via the expectations of market participants even if the 25bp policy cut is delayed until mid-December. By this we mean that 2- to 5-year SONIA rates have been trading at their lowest levels (3.5%-3.6%) since the autumn of 2022, so easier monetary policy is being transmitted via the lending and hedging markets even with the policy rate at 4%. To this point Deputy Governor Lombardelli said the discussion around the neutral policy rate (that neither acts to increase or decrease inflation) gathered pace at this meeting.

So where do we go from here? Despite all the noise and policy balloon flying the budget on 26^th November remains a key juncture. The extent to which fiscal outlays slow versus prior years alongside tax increases could determine whether forward policy rates can fall more quickly towards their assumed neutral level or hold and bounce back up in response to a less austere policy mix. It is clear from the level of household saving and business investment that precautionary buffers have been built, so an element of de-stressing post Budget is in the offing if the Chancellor can make the news less bad than feared. The fall in gilt yields and inflation in recent months with steady growth in tax receipts suggests that the increase in taxes could be towards the lower end of expectations of £10-15bn rather than the £25-30bn. Perhaps reasons for the national mood to be less dour over the festive period and into 2026.

We maintain the view that the landing zone for policy rates would be 3.0-3.5% as inflation returns to target and growth bumps along between 0.5% to 1.5%, and the market is priced for the base rate to hit 3.25% to 3.5% by the middle of next year.