Bank of England Interest Rate Decision November 2025 - My Take

Key Concepts

Monetary Policy Meeting: A regular gathering of a central bank's committee to discuss and decide on interest rates and other monetary policy tools.
Bank Rate: The primary interest rate set by the Bank of England, influencing borrowing and lending costs across the economy.
Inflation: The rate at which the general level of prices for goods and services is rising, and subsequently, purchasing power is falling. The Bank of England's target is 2%.
Disinflation: A decrease in the rate of inflation; inflation is still positive but falling.
Reinflation/Upward Acceleration: An increase in the rate of inflation.
Doves: Members of a monetary policy committee who favor lower interest rates to stimulate economic growth.
Hawks: Members of a monetary policy committee who favor higher interest rates to control inflation.
Sticky Inflation: Inflation that is persistent and difficult to reduce.
Spare Capacity: The difference between the actual output of an economy and its potential output.
Stagflation: A situation characterized by high inflation, high unemployment, and slow economic growth.
Real Incomes: Income adjusted for inflation.
Super Tanker Analogy: Used to describe the lag and difficulty in changing the course of monetary policy due to its broad and slow-acting effects on the economy.
Taylor Rule: A monetary policy rule that describes how a central bank should set interest rates in response to inflation and economic growth.
Excess Reportable Income (ERI): A complex tax concept related to accumulated dividends in non-UK domiciled investment funds.
Monte Carlo Simulation: A statistical technique used to model the probability of different outcomes in a process that cannot easily be predicted due to the intervention of random variables.

Bank of England Monetary Policy Meeting Summary

Monetary Policy Decision and Rationale

The Bank of England's Monetary Policy Committee (MPC) decided to maintain the Bank Rate at 4% in their recent meeting. This decision was not unanimous, with a close vote of 5-4 in favor of holding rates steady. This narrow split indicates that the committee is nearing a point where monetary policy decisions are becoming less clear-cut.

The primary mandate of the Bank of England is to keep inflation at 2%. The current inflation rate stands at 3.8% year-on-year, which is the same as the previous month. While inflation is believed to have peaked, there was disagreement among committee members regarding the certainty of this peak and its future trajectory.

The core of the disagreement revolved around the stickiness of inflation.

The Majority (5 members): Advocated for holding rates at 4%, believing that inflation might be entrenched and requires a tight monetary policy to "squeeze the remaining pips out of inflation." This group, including Governor Andrew Bailey, adopted a "wait and see" approach, seeking more confirmation that inflation is firmly on a downward path to the 2% target.
The Minority (4 members): Argued for a 0.25% (25 basis points) rate cut. These "doves" believed that sufficient action had already been taken to curb inflation, which is now falling. Their concern was that current policy was too restrictive, posing a greater risk to economic growth. They viewed the risk as being more about growth than inflation at this juncture.

Inflation Outlook and Risks

The Bank of England's opinion is that inflation has peaked. However, there was disagreement on how solid this peak is and whether it will persist. The bank's forecast suggests inflation will drop to around 3% early next year and then gradually return to the 2% target over the following year. This is described as a "very gradual process."

The committee is navigating a delicate balance between controlling inflation and supporting economic growth.

Risk of Sticky Inflation: If inflation proves more persistent, interest rates may need to remain higher for longer. This is the "upside scenario" for inflation but a negative outcome for borrowers and potentially for overall economic activity.
Risk of Undershooting Inflation Target: Conversely, if demand is squeezed too much, inflation could fall below the 2% target. This "downside scenario" could lead to reduced demand for goods and services, increased unemployment, and a potential recession. This is a significant concern given the UK's already weak growth.

The Bank of England's forecasts are conditioned on known information and do not factor in potential future policy changes, such as the upcoming November 26th budget. Higher taxes from the budget could slow economic activity, potentially reducing the need for restrictive monetary policy and increasing the likelihood of rate cuts.

Labor Market and Wage Growth

Vacancies in the UK have fallen sharply, and unemployment has edged higher, indicating some cooling in the labor market. However, these levels are still historically low.

Wage growth in the private sector has slowed from approximately 5% year-on-year to 4.4%. While this is a positive development for the Bank, some members, like Deputy Governor Sarah Breeden, believe that wage growth needs to be closer to 3% to be consistent with the 2% inflation target.

Services inflation, which is heavily influenced by wage costs, is also easing but not as rapidly as desired.

The debate on the labor market centered on the amount of "slack" or spare capacity:

Doves: Believed there was sufficient cooling in the jobs market and spending to drive inflation down.
Hawks: Worried that structural changes, such as higher minimum wages, increased national insurance costs, and lower labor market participation, might mean the economy has less spare capacity than previously thought. This could contribute to inflation stickiness.

Economic Growth and Consumer Behavior

UK GDP growth is weak, with Q3 2025 GDP rising by only 0.1% and Q4 projected to be around 0.2%. This low growth, coupled with relatively high inflation, points to stagflation, a challenging scenario for the Bank of England.

A significant factor influencing the economy is household caution. Despite recovering real incomes, saving rates are unusually high. Consumers appear to be rebuilding financial buffers after the cost of living shock and may be anticipating future inflation spikes, leading to reduced spending. This caution could persist, keeping consumption weak, reducing demand, increasing unemployment, and potentially causing inflation to undershoot the target.

Future Policy Expectations and Market Pricing

The Bank of England acknowledges that its policy remains restrictive. The next move is expected to be a further gradual reduction in interest rates.

Following the press conference and minutes, markets are now pricing in two rate cuts between now and summer next year, which is one more cut than anticipated before the meeting. This suggests that the Bank's signaling has influenced market expectations towards a more accommodative stance.

The central projection implies a gradual downward path for rates, potentially settling around 3.5% next year. However, the Bank emphasizes that this is not guidance and policy remains data-driven.

Improvements in Communication and Reporting

The Bank of England has implemented a new format for its Monetary Policy Committee (MPC) reports, which is considered a significant improvement. This new format provides:

Greater insight into policy formation: Including sections on Taylor rules and their application.
Clearer key inputs: Making it easier to understand the data driving decisions.
Informative boxes: Discussing specific economic aspects, such as developments in firms' costs and margins, based on direct engagement with businesses.
Comparative data: Implied paths for policy rates in the UK, US, and Euro area.
Detailed UK economic data: Including household and corporate interest rates.
Insights from direct engagement: Governor Andrew Bailey and other officials visit companies to understand the impact of policy on hiring and wage decisions.

The minutes now include brief statements from each committee member, offering valuable insights into their individual analyses and perspectives.

Specific Member Perspectives (from Minutes)

Andrew Bailey (Governor): Believes upside risks to inflation have lessened but wants to see confirmation that disinflation is durable and that the current inflation "hump" at 3.8% will start falling. He is in the "wait and see" camp.
Megan Greene, Silvana Tenreyro, Catherine Mann, and Huw Pill: These four members were focused on the danger of persistent inflation, driven by high expectations of future price growth and strong pay deals, potentially leading to structural changes. They voted to hold rates steady.
Sarah Breeden, Swati Dhingra, Dave Ramsden, and Alan Taylor: This group believed that disinflation is well-established, growth is weak, and policy is too restrictive. They advocated for a 0.25% rate cut.

Upcoming Events and Their Impact

The November 26th budget is a significant upcoming event. If it involves fiscal tightening (reduced government spending), it could slow economic activity, assist the Bank of England in reducing inflation, and increase the chances of a rate cut before the end of the year. The Bank will incorporate the budget's impact into its forecasts and decisions at the December meeting.

Consumer Questions and Discussion

Tax on Accumulated Dividends in Limited Companies: The discussion touched upon the complexity of tax treatment for accumulated dividends in ETFs held by limited companies. It was suggested that while Excess Reportable Income (ERI) applies, it falls under corporation tax rather than income tax, and dividend exemptions may be available. Consulting a corporate accountant is recommended.
Bitcoin's Legal Use: The speaker expressed skepticism about Bitcoin's genuine legal use in developed markets like the UK, citing the efficiency of existing payment systems. While it offers speculative opportunities and portfolio diversification, its utility for everyday transactions is limited. It might be more relevant in countries with hyperinflation or unstable governments.
Crypto ETNs: The speaker confirmed purchasing a crypto ETN and plans to create a video on the topic. They addressed concerns about credit risk, noting that ETN issuers structure them to be bankruptcy remote.
Expected Growth Rates for Forecasting: For simple global equity funds, the speaker recommends using long-term historical data like the Dimson, Marsh, and Thornton numbers. They suggest a real return of 5-6% for equities and 4% less for bonds. They also emphasize the importance of using Monte Carlo simulations to account for uncertainty in forecasts.
Chocolate Inflation: A specific example of accelerating inflation was highlighted with chocolate prices increasing by 18.1% year-on-year, contrasting with the general trend of disinflation.
Administered Prices: Factors like energy price caps and water prices are estimated to be pushing up headline inflation by around 0.4 percentage points.

Poll Results

A poll conducted during the live stream revealed that 69% of viewers would have kept rates the same (hawks), while 31% would have cut rates (doves). This suggests that the audience, likely savers, is more concerned about the risk of inflation than the slowdown in the economy, mirroring the Bank of England's cautious stance.

Conclusion and Takeaways

The Bank of England's monetary policy meeting highlighted a committee divided on the optimal path forward. While inflation is believed to have peaked, concerns about its persistence and the potential impact on economic growth create a complex decision-making environment. The Bank is committed to a gradual reduction in interest rates, but the pace and timing remain data-dependent. The upcoming budget will be a key factor influencing future policy decisions. The improved communication from the Bank of England is seen as a positive development for understanding their policy rationale.