In a landscape marked by persistent inflationary pressures and a cooling yet resilient labour market, the Bank of England (BoE) has signaled a measured approach to monetary policy. This, according to recent insights from KPMG UK.
Recently, the Monetary Policy Committee (MPC) elected to hold the Bank Rate steady, a decision that underscores a subtle hawkish tilt amid evolving data.
This comes hot on the heels of August’s inflation figures, which held firm at 3.8%, offering a mixed bag of relief and caution.
KPMG UK economists, led by Yael Selfin, Vice Chair and Chief Economist, have dissected these developments, highlighting the intricate balance between domestic policy shocks and global trends.
The BoE‘s decision to maintain rates aligns with its pattern of stability at alternate meetings, but the tone has shifted since August.
As Selfin notes,
“The MPC have on balance become slightly more hawkish… with recent data being a key driver behind this shift.”
The labour market, while cooling, shows diminishing signs of sharp deterioration—unemployment ticked up modestly, but wage growth remains above target.
This resilience weakens the case for aggressive easing. Compounding this, inflation is poised for a near-term uptick, propelled by volatile categories like food prices, which could ripple into broader pricing expectations among businesses and households.
KPMG’s analysis points to a less favourable economic backdrop, tilting odds against additional rate cuts this year.
Yet, optimism lingers for the horizon. Forward-looking surveys indicate pay growth easing toward the 2% target over the next year, while inflation is projected to crest and then retreat to the BoE’s 2% goal by mid-2026.
Selfin anticipates a narrow MPC majority favouring a 25 basis point reduction in November, guiding rates to 3.75% by year-end.
“With inflation expected to return to target in mid-2026,” she explains, the path allows for gradual normalisation without reigniting price spirals.
This rate hold intersects directly with the latest Consumer Prices Index (CPI) data, released earlier this week.
Headline inflation stagnated at 3.8% for August, defying expectations of a slight dip.
Services inflation, a bellwether for domestic pressures, offered a silver lining by easing to 4.7% from 5.0%—a nod to softening demand in a high-rate environment.
However, core measures remain elevated, underscoring sticky underlying dynamics.
Selfin describes this as a “conundrum for the Bank,” reinforcing the cautious stance as rate-cut probabilities wane.
The UK’s inflation trajectory has diverged sharply from peers like the US and Eurozone, where figures hover closer to 2%.
Since April, domestic policies—chief among them the hike in employers’ National Insurance Contributions—have been the culprits.
Businesses, facing squeezed margins, have swiftly passed these costs to consumers, amplifying headline numbers.
Looking ahead, KPMG forecasts a temporary peak at 4% this autumn, before a gradual unwind in early 2026.
This projection hinges on base effects from energy and regulated prices fading, alongside anticipated fiscal restraint in the upcoming Budget.
Yet, risks abound: geopolitical tensions could jolt energy costs, while a buoyant jobs market might sustain wage pressures.
Beyond rates, the MPC’s parallel move on Quantitative Tightening (QT) merits attention.
The committee opted to dial back active gilt sales to £70 billion over the next year, from £100 billion—a pragmatic pivot to alleviate strains on the bond market.
As the only major central bank actively shrinking its balance sheet, the BoE’s approach has drawn scrutiny for exacerbating liquidity squeezes.
Slowing QT, KPMG argues, will “ease some of the pressure on the UK bond market in the run up to the Budget,” potentially stabilising yields and borrowing costs for households and firms.
For businesses, these signals demand agility.
Elevated rates prolong financing challenges, particularly for SMEs grappling with higher input costs.
Consumers, meanwhile, face a squeeze on disposable incomes, curbing spending and clouding retail outlooks.
On the fiscal front, the Chancellor’s Autumn Statement looms large; KPMG urges policies that bolster supply-side reforms to tackle inflation without stifling growth.
In Selfin’s view, the MPC’s November pivot could mark the inflection point, blending hawkish vigilance with pragmatic easing.
“We expect a small majority… to look through the expected near-term rise in inflation, weighing it against softer signals from the labour market.”
As the UK economy treads this tightrope, the blend of steady rates, moderated QT, and a watchful eye on inflation underscores a policy framework that will be prioritising sustainability over quick actions.
