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As the Bank of England’s Monetary Policy Committee (MPC) prepares to announce its latest interest rate decision at noon on Thursday, November 6th, the UK economy finds itself at a crossroads. While most analysts expect the base rate to remain at 4%, a swirl of economic signals, fiscal uncertainty, and market volatility has intensified speculation about a surprise rate cut.
Economic Strains and Inflation Plateau Fuel Speculation
The UK’s economic engine is sputtering. Growth has stalled, unemployment is rising, and wage growth is slowing—classic symptoms that typically justify monetary easing. Inflation, meanwhile, has held steady at 3.8% for three consecutive months, slightly below the expected 4% peak. This cooling trend has led markets to price in a one-in-three chance of a 25-basis-point rate cut, leaving sterling vulnerable to a sharp reaction depending on the outcome.
Yet, inflation remains nearly double the Bank’s 2% target, and caution prevails. The MPC is unlikely to act without clearer signs of a sustained downward trend. Moreover, the upcoming Autumn Budget adds another layer of complexity, with fiscal policy expected to play a decisive role in shaping the economic outlook.
Sterling Stabilises—But Remains Fragile
Earlier on Wednesday, the pound showed signs of stabilisation, rising 0.2% against the dollar to $1.3049. However, it had dipped to $1.3011 in early Asia trade—its lowest level since mid-April. Against the euro, sterling hovered near its weakest point in over two years, trading at 88.07 pence after hitting 88.3 pence in Asia, the highest since May 2023.
The pound’s recent weakness has been driven by cooler-than-expected inflation data and broader market dynamics. Chris Turner, global head of markets at ING, noted that sterling’s slide “probably has more to do with the global equity correction,” as highly valued tech stocks have come under pressure this week. Historically, the pound performs well when investors are optimistic about global growth and equity markets—but falters when sentiment sours.
Tax Choices and Fiscal Credibility Under Scrutiny
Finance Minister Rachel Reeves has signalled broad tax increases in her pre-budget speech, setting the stage for tough decisions. The Resolution Foundation estimates Reeves may need to announce £26bn in tax hikes, while the EY Item Club projects the figure could reach £40bn due to elevated borrowing costs, the reversal of £6bn in welfare savings, and a downgraded productivity outlook from the Office for Budget Responsibility (OBR).
Stephen Millard of the National Institute of Economic and Social Research (NIESR) argues that Reeves must make “brave choices,” including potentially breaking her manifesto pledge by raising income tax. He warns that tinkering with marginal taxes won’t suffice, and that a mix of tax increases and spending cuts is essential to put the economy “back on track.”
Critically, experts caution against relying on VAT or corporation tax hikes. The former risks “pushing up inflation,” while the latter could deter investment and “lead to permanently lower GDP.” Without restoring fiscal credibility, borrowing costs could remain elevated and debt levels may reach “unsustainable” thresholds.
Growth Outlook and Monetary Policy Path
Despite the fiscal headwinds, NIESR has upgraded its 2025 growth forecast to 1.5%, up from 1.3% in August, though it maintains a modest 1.2% projection for 2024. The EY Item Club echoes this sentiment, forecasting 1.5% GDP growth next year, supported by increased public spending. However, it warns that tax hikes, global trade disruptions, and high interest rates will continue to weigh on momentum.
As for monetary policy, the EY Item Club expects the Bank of England to hold rates steady this week, followed by two quarter-point cuts by mid-2026. This gradual easing reflects the Bank’s cautious approach amid persistent inflation and fiscal uncertainty.
What It Means for Households
While a rate cut could offer short-term relief on borrowing costs, it won’t resolve deeper financial pressures. Households continue to grapple with high living expenses, stagnant wages, and the prospect of future tax rises. The message remains clear: plan ahead, spend wisely, and brace for a slow recovery.
With sterling teetering near multi-year lows and fiscal policy in flux, the MPC’s decision will be closely watched—not just for its immediate impact, but for the signal it sends about the Bank’s confidence in the UK’s economic trajectory. The stakes couldn’t be higher.
