There is a buzz outside the Bank of England.
City workers are taking advantage of the unusually mild weather to enjoy lunch outside, and there has been a shift in temperature too inside the Bank.
The decision to hold rates at 4% was made by the narrowest of margins, and the interest rate panel thinks inflation has peaked.
Governor Andrew Bailey said he wanted to see if forthcoming developments confirmed this view before cutting rates; weakness in the labour market could also play a part.
The Bank also noted last year’s Budget measures – such as an increase in employer National Insurance Contributions and minimum wages – contributed to price pressures over the last year.
A key factor in future decisions will be the contents of the forthcoming Budget, which may ease price pressures with direct measures on bills, but also tax rises taking money out of pockets.
The chancellor has been keen to claim credit for creating the conditions for rate cuts by providing the right environment. But the Bank’s report makes clear that last year’s Budget measures have contributed to price pressures, and hiring hesitancy by adding to employer’s costs.
Ironically it is the impact on the labour market that may have contributed to views of the rate setters already looking to cut the cost of borrowing.
While the Bank itself refused to speculate about the contents of this Budget, it noted signs that concerns elsewhere, among consumers and businesses, may be holding back the economy.
With consumer spending remaining cautious, it expects the economy to grow by 1.2% in 2026, less than the 1.5% it predicts this year – that will not be welcomed in the Treasury.
The interest rate panel will have plenty to evaluate in the Budget – the scale and shape of tax rises, help with energy bills and possibly other cost of living challenges, and increases in the National Living Wage.
According to the Bank’s research, labour costs remain a key uncertainty for employers and also for consumer prices.
The rate setters will have to judge the impact of those policies – and the usual monthly evidence on inflation, jobs and so forth – by the next meeting in mid-December.
By, in effect, holding the cast vote, it’s the governor who may find himself deliberating whether to play Santa – or Scrooge.
If not then, economists reckon a cut will come in February.
And how many more to follow?
The Bank says it sees rates continuing on a “gradual downward path”. Some members remain nervous about lingering inflation pressures.
Its research, for example, shows our expectations of inflation are shaped by recent experience, and in particular, the movements of food prices.
We are still reeling from the exceptional pace of price hikes in recent years and that can lead people and businesses to behave as if inflation is higher than it really is – through wage demands or price increases.
Meanwhile, hundreds of thousands of homeowners will still face rising costs when renewing their mortgages as rates remain higher than a few years ago: they’ve been slower to come down than they were to go up.
Borrowers may expect more gifts in 2026, but they may arrive only gradually.
