Bank of England: a skip, not a pause

At its meeting on 06 November, the Bank of England (BoE) Monetary Policy Committee (MPC) left its policy rate, Bank Rate, unchanged at 4%. This was significant in that it broke the cycle of rate cuts at every other meeting, which had persisted since August 2024. Five members of the MPC voted in favour of the decision, marginally edging out the four members who preferred to cut Bank Rate by 25 basis points to 3.75%. 

A gradual decline in inflation expected
The Bank believes inflation peaked at 3.8% year-on-year in September and will gradually decline from its current level. However, the updated set of baseline forecasts released in November’s Monetary Policy Report highlight that the decline in inflation is expected to be gradual. Indeed, the Bank does not project inflation to fall back to the 2% target until 2027 (see Chart 1).

Chart 1. UK inflation outlook (% change, year-on-year)

Sources: LSEG Data & Analytics, Bank of England and EFGAM calculations. Data as at 07 November 2025.

The BoE noted that current rates of wage growth and services price inflation need to decline for the MPC to be confident that inflation will fall back to the 2% target in a sustained manner. However, recent data have been promising in that regard (see Chart 2). Inflation in the services sector and wage growth have both been trending lower since mid-2023.

Chart 2. Services inflation and wage growth (% change, year-on-year)

Sources: LSEG Data & Analytics and EFGAM calculations. Data as at 07 November 2025.

Furthermore, BoE Governor Andrew Bailey highlighted that he finds the downside scenario for inflation more likely than the upside scenario. That is to say that the risk of inflation falling too low, due to weak demand and employment growth, has become more apparent. This is supported by the UK’s Beveridge Curve (see Chart 3).

Chart 3. UK Beveridge Curve

Sources: Office for National Statistics, Bank of England and EFGAM calculations. Data as at 06 November 2025.

Labour market dynamics
The Beveridge Curve shows the inverse relationship between vacancies and unemployment. When the vacancy rate is high, the unemployment rate tends to be lower, and vice versa. The slope of the Beveridge curve was relatively flat from 2001 to 2019 but steepened during the pandemic. This implied that larger changes in the vacancy rate resulted in smaller changes in the unemployment rate. 

Data in 2025 suggest that the UK Beveridge Curve has returned to the slope seen from 2001 to 2019. If this trend is sustained, it means that a small decline in the vacancy rate would lead to a potentially large increase in the unemployment rate. Higher unemployment would lead to weaker demand, putting downward pressure on inflation. This is one of the main reasons that many MPC members now believe that inflation risks are skewed to the downside.

Looking ahead
The Bank was keen to point out that it remains data dependent. If services inflation and wage growth plateau at these levels, the prospect of a rate cut in December diminishes significantly. However, if data continue to match MPC members’ expectations then a rate cut is the likely outcome of the December meeting. Markets currently assign around a 58% probability to a rate cut on 18 December. Given the apparent increase in downside risks, the Bank’s November meeting likely represented a skip in the rate cutting cycle and not a pause.