If the Bank of England presses ahead with its expected interest rate cut this Thursday, bringing the base rate down to 4% from 4.25%, it will do so not as an act of bold policy, but of dangerous wishful thinking.
With inflation still hovering at 3.6%—nearly double the Bank’s official 2% target—the case for monetary loosening is shaky at best and reckless at worst. Yet markets are pricing in not just one rate cut, but a second before the year’s end. A growing number of policymakers appear ready to act, even as hard data casts doubt on whether underlying price pressures have truly been tamed.
This is not how monetary stewardship is meant to work. The Bank, under Governor Andrew Bailey, has repeatedly insisted that it is data-dependent and not beholden to political winds. But if Thursday’s decision follows market expectations rather than economic realities, the credibility of the institution will be further eroded—a dangerous development at a time when long-term inflation expectations are already ticking upward.
The inflation picture in the UK is not just troubling in the headline figures, it is troubling in its composition. Unlike the eurozone or the United States, both of which have seen core inflation fall more decisively, Britain is still grappling with sticky domestic pressures. Private sector wage growth remains too high, and input cost pressures have reaccelerated, as shown in the latest Purchasing Managers’ Index (PMI) data. Firms are passing those costs on to consumers—exactly the dynamic that rate hikes are meant to suppress.
A premature rate cut sends the wrong signal. It risks locking inflation in at levels the Bank would later struggle to contain, forcing either a rapid tightening cycle once again—or a tolerance of “high-ish” inflation that quietly erodes living standards and punishes savers. Worse, it could leave the Bank flat-footed if energy prices or geopolitical shocks (not implausible in the current global climate) push price levels higher in the coming months.
The argument from the dovish camp is that inflation is falling—and they are not entirely wrong. The Consumer Price Index has come down sharply from its double-digit peak last year. The economy is stagnating, the labour market is cooling, and consumer confidence remains fragile. In their view, maintaining rates at 4.25% risks overkill: driving the economy into unnecessary recession in pursuit of a goal that may already be within reach.
But this underestimates two things: the stubbornness of UK-specific inflation drivers, and the fragility of central bank credibility. Inflation is not just an economic phenomenon—it is a psychological one. If households and businesses believe the Bank is giving up too soon, they will bake in higher prices and wages, locking the cycle into place. One doesn’t have to look far into the history books to see how difficult it is to re-anchor expectations once they drift.
Moreover, the Bank has a credibility problem already. It was too slow to raise rates in the early phase of the inflation surge, insisting for too long that price rises were “transitory.” When it finally acted, it did so hesitantly, often behind the curve compared to the Federal Reserve and the European Central Bank. That hesitation helped inflation become more deeply embedded than in our transatlantic counterparts.
To now risk another misstep by easing too early would be to compound past errors. The real economy is not in great shape—true. But monetary policy cannot be the catch-all remedy for poor productivity, overregulation, and chronic underinvestment. Those are problems for the Government and the private sector to solve—not the Bank’s remit.
It’s also worth remembering that interest rates remain relatively low by historic standards. The notion that 4.25% is somehow punishingly tight is only credible in the post-2008 bubble world of free money. For a country with persistent inflation problems, a 4.25% base rate is not austerity. It is prudence.
The deeper issue is that we are being fed the narrative that inflation has been “defeated” when it plainly hasn’t. The pressure to cut is political, not empirical. Ministers want economic good news ahead of a likely general election next year. Businesses want relief from borrowing costs. Consumers want cheaper mortgages. But none of those are sound reasons for a central bank to ease when inflation is still almost twice its target.
If the Bank of England does follow through with a cut on Thursday, it must at the very least accompany it with a clear, hawkish message: that further cuts will be conditional, not automatic; that inflation remains its primary focus; and that the battle is not yet won. Anything less will reinforce the view that the Bank has lost its way.
In a period where global markets are jittery and political instability abounds, Britain needs a central bank with backbone—not one that jumps at shadows or bows to pressure. Governor Bailey and the Monetary Policy Committee face a simple choice this week: restore confidence, or squander it.
Main Image: Bank of England, via Wikipedia
