Bank of England faces policy pivot 

Written by Mark Michaelides, chief commercial officer of lender Molo 

While the Bank of England’s Monetary Policy Committee’s fifth rate cut in the past twelve months illustrates continued momentum on the downward path of interest rates, the Bank’s latest policy decision may trigger something of a policy rethink. 

The balance between rising inflation and a weak labour market – the stark competing pressures of stubborn inflation and a slow-growth economy has increased the uncertainty of the policy path.  The initial 4-4-1 vote result shows the internal division within the committee has intensified. 

This suggests to me that we might see the rate of cuts slow.  Deutsche Bank now expects the Bank of England to cut interest rates only once this year in November (possibly delayed until December).  Previously, they expected two cuts this year (in November, December) and another in February 2026.   

Indeed, the Bank of England’s governor Andrew Bailey told the BBC that although the path for interest rates is still downwards, the course is now “a bit more uncertain”.  This could mean fewer cuts before we reach the end of the rate-cutting cycle, or the same number of cuts but more spaced out. 

There are some reputable names out there who think we won’t see any more cuts this year.  Pantheon Macroeconomics, for example, assumes there will be no more cuts now – and no more cuts in 2026.  They think growth is solid and estimate that underlying GDP averaged 1.9 per cent month-to-month annualised, from November to May, after adjusting for tariff and tax front-running as well as retail sales volatility.  They highlight that retail sales averaged 0.3 per cent month-to-month growth so far this year, suggesting consumers are making use of strong real income growth.  They think that after six years of near-continuous inflation overshoots, the Monetary Policy Committee can no longer ignore inflation running at twice its target if it is to maintain its credibility. 

Personally, I think that’s a little pessimistic.  I still think interest rates are on their way down.   

First, the recent jobs statistics are dreadful and the MPC will have to consider the data in their decision-making.  Wage growth and employment slowed in the three months to June – yet more evidence of a cooling jobs market.  There were further signs of a slowdown in the jobs market in July, too, with falling employment and vacancies last month.  Payrolled employees declined by 164,000 in July compared to the same month last year.  The number of vacancies across the economy fell by 44,000 – the 37^th month of consecutive decline to 718,000.  Demand is weak and it seems clear that firms are not recruiting new workers or replacing workers who have left.  The number of employees on payroll has now fallen in ten of the last 12 months.   

Second, according to UK construction purchasing managers, construction has been in decline all year and tumbled to a new post-covid low in July.  According to the latest S&P Global Purchasing Managers’ Index (PMI), total construction activity levels fell at the steepest pace since May 2020.  With equity markets hovering near record highs, the PMI figures offer a critical barometer of economic momentum.  The headline PMI was 44.3 in July, down from 48.8 in June; the previous post-covid low was a reading of 44.6 in February 2025. Any score below 50 indicates a decline in activity. The lower the score, the steeper the decline.  July’s score was perilously close to June 2019’s reading of 43.1, which – the pandemic aside – remains a 15-year low.  Respondents blamed site delays, lower volumes of incoming new business and weaker customer confidence for July’s poor showing.  Pantheon Macroeconomics are very casual about the PMI numbers but with equity markets hovering near record highs, the PMI figures offer a critical barometer of economic momentum and I think they ought to be taken seriously . 

The Monetary Policy Committee can’t ignore those sorts of numbers.  That’s why I think rates will continue to fall.  I am not the only one.  Deutsche Bank still think rates will reach 3.25 per cent by the second quarter of 2026.  Some banks, such as Morgan Stanley, still assume the bank rate will eventually be eased much further to 2.75 per cent by the end of 2026. 

The Bank of England is not alone.  Broader international inflation dynamics and positive US inflation data has led to greater expectations of Fed cut in September.  And Donald Trump’s attacks on the chair of the Federal Reserve, Jerome Powell, suggest that we can assume whoever he might appoint to succeed him, the US will have looser monetary policy next year, too. 

If investors can ‘make the maths work’ on current interest rates, then there should be medium-term upside from any rate decreases.  For IFAs and brokers, this is a crucial opportunity to help clients reassess their options, whether they’re nearing the end of a fixed deal or looking to improve affordability.