BoE Decision Forecast: Interest Rate Stability Amid Economic Challenges in 2025

Analysts and markets anticipate that the Bank of England (BoE) will maintain its key interest rate at 4% during the Monetary Policy Committee (MPC) meeting on Thursday, 18 September 2025. This decision comes amid rising inflation and sluggish economic growth, placing the Bank in a delicate position to balance curbing inflation while supporting economic activity. Additionally, the Bank is expected to slow the pace of its Quantitative Tightening program, which aims to reduce its government bond portfolio, while prioritizing financial market stability. This report provides a comprehensive overview of the expectations, with an analysis of their impact on the FTSE index and the British pound, focusing on the challenges and opportunities facing the UK economy.

Interest Rate Expectations

Forecasts indicate that the Bank of England will keep the interest rate steady at 4% in September 2025, driven by several key factors. First, persistent inflation at 3.8% in July 2025, exceeding the Bank’s 2% target, fueled by rising food prices, supports maintaining the current rate. Second, economic growth has slowed, with GDP recording 0.7% growth in the first quarter and 0.3% in the second quarter of 2025, alongside noticeable weakness in consumer spending and domestic investment. This situation reinforces caution in adjusting rates to avoid exacerbating a potential recession. Third, market consensus suggests a 97% likelihood of maintaining the rate, as confirmed by Governor Andrew Bailey on 3 September 2025, who emphasized that any future rate cuts would be gradual due to ongoing economic uncertainties.

Quantitative Tightening

The Bank of England is expected to ease the pace of its Quantitative Tightening program in response to rising bond yields and increased market scrutiny. In September 2024, the MPC unanimously agreed to reduce bond holdings by £100 billion over the year, bringing the total to £558 billion by September 2025. This measure aims to ensure market stability while mitigating pressures on financial liquidity, reflecting a cautious approach to monetary policy management.

Influencing Factors

The Bank’s decisions are shaped by several key economic factors. Inflation stands at 3.8% (CPI), 4.2% (CPIH), and 4.8% (RPI) in July 2025, driven by rising prices of food items such as butter, chocolate, and eggs, posing the most significant challenge. The labor market shows signs of slowing, with wage settlements rising to 3.5% in the first half of 2025, helping to ease domestic inflationary pressures. Global trade has been impacted by U.S. tariffs introduced in April 2025, though recent agreements have alleviated some uncertainties, slightly boosting global demand. Finally, weak consumer spending and investment further encourage caution in adjusting monetary policy.

Analysts’ Views

Analysts’ expectations vary regarding the future. Some predict a rate cut to 3.25% by the second quarter of 2026, with a possible reduction in December 2025. Others foresee no cuts in 2025 unless the labor market deteriorates significantly.

Still some economics suggest a potential cut in November 2025 with lower confidence, while others anticipate a cut in November 2025, followed by two more in 2026. These forecasts reflect the prevailing uncertainty in the markets.

Impact on FTSE and the British Pound

Maintaining the interest rate is likely to strengthen the British pound, exerting downward pressure on the FTSE 100, particularly on export-oriented companies like AstraZeneca, which recently saw a 3.2% drop in its share price due to the pound’s strength. The FTSE 100 fell by 0.1% recently, driven by weaknesses in the pharmaceutical and financial sectors, while the FTSE 250 rose by 0.1%.

Slowing Quantitative Tightening may provide some stability for bonds, but the strong pound remains a challenge for export-reliant stocks. The pound rose to 1.3645 USD, then stabilized at 1.3624 USD, while slightly declining against the euro to 86.65 pence. Continued caution in monetary policy could further support the pound’s rise, especially given policy divergence with the U.S. Federal Reserve.

Impact on Markets and Consumers

Fixed mortgage rates have risen to 4.97% for two years and 5.02% for five years, prompting borrowers to seek better deals to alleviate financial burdens. For savers, inflation at 3.8% means less than half of savings accounts offer real returns, reducing purchasing power and impacting consumers. These challenges underscore the need for precise financial policies to support economic stability.