Monetary Policy Report - November 2025

Monetary Policy Summary

At its meeting ending on 5 November 2025, the Monetary Policy Committee voted by a majority of 5–4 to maintain Bank Rate at 4%. Four members voted to reduce Bank Rate by 0.25 percentage points, to 3.75%.

CPI inflation is judged to have peaked. Progress on underlying disinflation continues, supported by the still restrictive stance of monetary policy. This is reflected in an easing of pay growth and services price inflation. Underlying disinflation is being underpinned by subdued economic growth and building slack in the labour market.

Monetary policy is being set to balance the risks around meeting the 2% inflation target sustainably. The risk from greater inflation persistence has become less pronounced recently, and the risk to medium-term inflation from weaker demand more apparent, such that overall the risks are now more balanced. But more evidence is needed on both.

The restrictiveness of monetary policy has fallen as Bank Rate has been reduced. The extent of further reductions will therefore depend on the evolution of the outlook for inflation. If progress on disinflation continues, Bank Rate is likely to continue on a gradual downward path.

Monetary Policy Overview

The Monetary Policy Committee’s (MPC’s) job is to ensure that inflation falls all the way back to the 2% target and stays there. Monetary policy has helped reduce inflationary pressures over the past three years. That has allowed the MPC to make monetary policy less restrictive by cutting Bank Rate five times since August 2024.

CPI inflation was 3.8% in August and September, partly reflecting developments in food and administered prices. That is likely to be the peak. Beneath the headline numbers, underlying price and wage pressures have continued to ease. Inflation is likely to fall to close to 3% early next year before gradually returning towards to the 2% target over the subsequent year.

But that is not yet assured. The MPC needs to see more evidence that inflation is on track to fall back all the way to the 2% target before it can cut Bank Rate again.

Where monetary policy goes from here depends on how two big forces play out.

On the one hand, inflation is still well above the 2% target. It might remain persistently high, for example if increases in administered prices were repeated, cost pressures were to remain strong or firms were to increase profit margins. It is also possible that the period of high inflation has affected the way wages and prices are determined in the economy, adding to inflationary pressures.

On the other hand, activity in the economy is below its potential. This is clear in the labour market, where the number of job vacancies has fallen and employment growth has stalled. There is a risk that households and businesses remain cautious about spending and investment, holding back demand and weighing on job prospects further. That could lead to inflation falling below the MPC’s target.

The current approach to setting interest rates, including today’s decision, is based on two key judgements.

Key policy judgement 1

Underlying domestic wage and price pressures are continuing to ease. Recent data suggest that the risk from greater inflation persistence has become less pronounced and the risk to medium-term inflation from weaker demand more apparent, such that overall the risks are now more balanced.

The latest evidence provides some comfort that underlying inflationary pressures are still easing and that the risk from greater inflation persistence is not materialising (Section 1.1). At 3.8% in September, CPI inflation was lower than forecast in the August Monetary Policy Report. Wage growth has continued to decline and there have been further falls in underlying services price inflation. Business surveys suggest that wage growth will continue to edge down over coming months. Alongside a fading effect from higher employer National Insurance contributions, that should lead services price inflation to fall back further. New analysis indicates that firms have passed through most of their recent cost increases to prices already, which would imply little inflationary pressure from past cost rises is left to come through (Box A: Developments in firms’ costs and margins).

Nevertheless, while the recent signs are promising, it is still too early to say that the upside risk to inflation has passed. Current rates of wage growth and services price inflation need to fall further for the MPC to be confident that inflation will fall back to the 2% target. And staff analysis finds that economic shocks tend to have a bigger impact on inflation when inflation is already above 3% to 4% (Box C: Prospects for CPI inflation when inflation is high). Long-lasting changes in labour supply might also result in higher inflation (Box F: Structural changes in the labour market). Moreover, there is a chance that expectations of future inflation could become self-fulfilling by pushing up wage bargaining and price-setting today (Box B: Inflation expectations and their role in wage and price-setting).

Whereas the risks from greater inflation persistence seem to have become less pronounced recently, the risks of too low inflation from weakening demand and the labour market have become more apparent. Underlying GDP growth remained weak in 2025 Q2 and survey indicators point to only a slight recovery in the remainder of the year (Section 1.2).

The outlook for household spending is a particular concern (Box D: Risks around the outlook for household consumption). The saving rate increased considerably during the pandemic and has so far not fallen back to historically more normal levels. That might indicate that there has been a more persistent shift towards higher saving, perhaps reflecting greater caution in light of the significant shocks that have hit household finances in recent years. It is also possible that households who are able to would want to continue to rebuild wealth after the recent period of high inflation.

There is also clearer evidence that the labour market is softening. Underlying employment growth has stalled and the unemployment rate has risen to 4.8%. Surveys suggest that businesses do not intend to take on many new staff, and the number of job vacancies has fallen. Any further weakening in labour demand could result in more pronounced increases in unemployment, as factors like weaker cash positions of small and medium-sized enterprises and higher employment costs make it harder for some companies to maintain current employment levels (Box E: The risks of a sharper rise in unemployment).

Key policy judgement 2

If progress on disinflation continues, Bank Rate is likely to continue on a gradual downward path.

Inflation is still above the 2% target. While the MPC has been able to cut Bank Rate from 5.25% to 4% since August 2024, interest rates need to remain high enough to be confident that inflation will fall all the way to target and stay there. If inflationary pressures continue to ease, Bank Rate is likely to continue on a gradual downward path.

The extent of any further rate cuts will depend on how the evidence on the potential sources of inflation persistence, and on the weakening in demand and the labour market, plays out. A gradual approach allows the MPC to assess carefully the balance of risks to inflation as the evidence evolves. As Bank Rate falls, how much further to lower it will inevitably become a closer call.

The central projection described in Section 3.1 provides a reasonable baseline for how the MPC judges the economy is likely to evolve if neither of the risks around inflation persistence and demand weakness materialise to a meaningful degree. In that projection, demand growth recovers as the impact of past increases in Bank Rate fades and as the impact of subsequent rate cuts, including future ones implied by market expectations, takes hold. Growth is also boosted by more supportive financial conditions and an improvement in global demand. On that basis, CPI inflation is projected to fall to close to 3% early next year and then declines gradually towards the 2% target over the subsequent year.

Section 3.3 sets out two scenarios illustrating how the economy might turn out differently if either of the two main risks set out in Key policy judgement 1 materialise. It gives an indication of how Bank Rate might need to respond if monetary policy were to follow simple policy rules derived from the economic literature. These alternative interest rate paths are illustrations, not promises or interest rate forecasts from the MPC.

In the inflation persistence scenario, households’ and businesses’ experience of high inflation over the past few years makes them more inclined to push up wages and prices in the future. This makes inflation stickier and slows the rate at which inflation declines. If that happens, the illustrative policy rules indicate that the path of Bank Rate would need to be higher than otherwise, and growth weaker, to ensure that inflation returns to the 2% target sustainably.

The weaker demand scenario explores the possibility that some of the strength in household saving in recent years was driven by greater caution and that continues. In the scenario, growth weakens, the output gap widens and inflationary pressures fade more quickly than in the central projection. According to the same illustrative policy rules, this would require lower interest rates than otherwise in order to return inflation sustainably to target.

At this meeting, the MPC voted to maintain Bank Rate at 4%. The risk from greater inflation persistence has become less pronounced recently and the risk to medium-term inflation from weaker demand more apparent. But more evidence is needed on both before cutting Bank Rate further. The MPC will reassess the inflation outlook and balance of risks at its December meeting.

1: Current economic conditions

1.1: Inflation

Headline CPI inflation was 3.8% in September.

CPI inflation was 3.8% in September, up from 3.6% in June and 0.2 percentage points below expectations in the August Report. Services price inflation accounted for most of the downside news relative to August, with much of that news expected to persist in the near term. Food price inflation was also somewhat lower than expected, while fuel prices were slightly higher. Energy price components accounted for most of the rise in headline CPI inflation since June.

Unusually large increases in administered prices, such as Vehicle Excise Duty and sewerage charges, are currently estimated to account for 0.4 percentage points of the overshoot in CPI inflation from target. Food, beverage and tobacco prices are estimated to be contributing a further 0.4 percentage points. Much of the remaining 1 percentage point of the overshoot is judged to reflect elevated labour cost growth, due to past strength in wage growth as well as higher employer National Insurance contributions (NICs), which in turn has pushed up services, and to a lesser extent, goods inflation.

Chart 1.1: CPI inflation was 3.8% in September

Contributions to CPI inflation ^(a)

• Sources: Bloomberg Finance L.P., Department for Energy Security and Net Zero, ONS and Bank calculations.
• (a) Figures in parentheses are CPI basket weights in 2025, which do not sum to 100% due to rounding. Data are shown to September 2025. Component-level Bank staff projections are shown from October 2025 to March 2026. The food component is defined as food and non-alcoholic beverages. Fuels and lubricants estimates use Department for Energy Security and Net Zero petrol price data for October 2025 and are then projected based on the sterling oil futures curve.

CPI inflation is projected to slow to 3.2% by March 2026.

Over half of the expected decline in CPI inflation over the next six months reflects a fall in the contribution of household fuel and energy bills. Although the Ofgem price cap increased slightly in October, to £1,755 from £1,720, the effects of increases in energy prices a year ago will drop out of the annual comparison and reduce the contribution to headline inflation by 0.2–0.3 percentage points over 2025 Q4 and 2026 Q1 relative to September. Food inflation and, to a lesser extent, core goods inflation, are expected to remain elevated.

An expected slowing in services inflation accounts for most of the remaining fall in CPI inflation to 3.2% in March. Services inflation is expected to fall to 4.3% in March, from 4.7% in September, as the effects of higher employer NICs begin to fade and lower wage growth continues to drag. The contribution from higher administered prices is expected to be little changed over the coming six months, but, to the extent that the large rises in administered prices in 2025 are not repeated next year, it is likely to reduce in 2026 Q2.

External inflationary pressures

Energy prices are lower than ahead of the August Report.

Spot oil prices were around $64 a barrel in the 15 working days to 28 October, lower than the $71 per barrel in the period leading up to the August Report. The oil futures curve has also moved lower across the coming three years. And the gas futures curve has fallen by around 6% on average over the same period.

Higher global tariffs appear to be weighing a little on UK non-energy import prices.

Non-energy import prices have been broadly flat over the past year (Chart 1.2). While it remains too early to assess fully the impact of higher global tariffs on UK inflation, they are judged to have weighed a little on UK-weighted global export prices. There has been tentative evidence of trade diversion, whereby exporters facing higher US tariffs, particularly in China, may have redirected goods to alternative markets. Chinese exports to the UK and euro area have increased, while those to the US have declined, and UK import prices from non-EU countries have edged down over 2025. Together with a small appreciation in sterling, lower global export prices have contributed to subdued inflation in UK import prices since the start of the year. UK import price inflation is expected to remain subdued in coming quarters.

Chart 1.2: UK import price inflation has been subdued

UK import prices ^(a)

• Sources: ONS and Bank calculations.
• (a) The final data point is 2025 Q2. Diamonds show Bank staff projections for UK import prices for the periods 2025 Q3–26 Q1.

Food price inflation is expected to remain elevated this year before slowing in 2026.

Food price inflation was 4.5% in September, much lower than the double-digit rates seen in 2022 and 2023 but well above its pre-Covid pandemic average of around 1½%. Higher global agricultural prices have been a key driver of the recent increase in food price inflation. In the three months to October, the S&P GSCI global agricultural price index in sterling terms increased by over 5% relative to a year earlier. And inflation among four components – butter, beef and veal, chocolate and coffee – which make up only 10% of the food CPI basket, is currently contributing nearly 2 percentage points to overall food inflation.

Nevertheless, as discussed in Box E of the August 2025 Monetary Policy Report, domestic factors – which are likely to affect most food components – have also contributed to recent increases in food price inflation. Annual wage growth in the food manufacturing sector (7%) and retail sector (6½%) remains above aggregate wage growth, in part due to a high proportion of staff in these sectors being paid the National Living Wage (NLW). Recent changes to the threshold at which employers start paying NICs are also likely to have disproportionately affected supermarkets. In addition to labour cost increases, contacts of the Bank’s Agents suggest the introduction of Extended Producer Responsibility regulations will continue to push up food prices in coming months.

Continuing pass-through of global and domestic cost increases means that food price inflation is expected to remain elevated over the remainder of 2025, before falling somewhat as these pressures fade.

Domestic inflationary pressures

Wage growth has declined across various measures…

Annual private sector regular AWE growth slowed to 4.4% in the three months to August, down from 4.9% in the three months to May (Chart 1.3, left panel, aqua line), below the projection in the August Report. Higher-frequency measures of AWE growth also point to waning momentum. Bank staff estimates abstracting from volatile movements in AWE indicate a three-month annualised growth rate of around 3.9% (Chart 1.3, right panel, orange line).

This recent slowdown is consistent with the signals from a range of other pay indicators shown in the left panel of Chart 1.3. The DMP Survey, Indeed Wage Tracker, and a proxy based on HMRC Real-Time Information (RTI) data all suggest that annual pay growth has eased modestly since the start of the year. Nonetheless, wage inflation remains elevated, primarily reflecting past labour market tightness and rises in inflation expectations.

Aggregate wage growth continues to be influenced by the NLW and the increase in employer NICs. Bank staff estimate that the increase in the NLW has boosted aggregate wage growth by around 0.2 percentage points this year. Meanwhile, evidence from the DMP Survey suggests that firms that report adjusting their pay in response to higher employer NICs have wage growth that is around 1 percentage point lower than those that do not, with the gap expected to narrow somewhat in coming quarters.

Chart 1.3: Indicators of wage growth have declined over 2025

Measures of private sector wage growth ^(a) and higher-frequency wage growth with the estimated trend ^(b)

• Sources: Bank of England Agents, DMP Survey, HMRC, Indeed, ONS and Bank calculations.
• (a) Private sector regular pay growth shows the ONS measure of private sector regular AWE growth (three-month average on same three-month average a year ago). DMP shows three-month average realised pay growth from the DMP Survey (three-month average on same three-month average a year ago). HMRC RTI shows median of private sector employee pay growth (three-month average on same three-month average a year ago). Indeed Wage Tracker shows annual average job title matched pay growth for UK job vacancies. Latest data points are for the three months to August 2025 for private sector regular pay, September 2025 for Indeed and HMRC RTI, and October 2025 for the DMP Survey. The Agents’ pay survey diamond shows respondents’ expectations for average pay settlements in 2025 taken from the January 2025 pay survey, weighted by employment and sector. The DMP diamond shows average expected pay growth one year ahead from the December 2024 DMP Survey. Private sector regular pay growth projection diamonds are for 2025 Q3 to 2026 Q2.
• (b) The measure of trend pay growth is constructed using an unobserved component-stochastic volatility model following the approach of Stock and Watson (2007). The model extracts trend and idiosyncratic components from monthly ONS private sector AWE, allowing for the volatility in both components to vary over time. Shaded areas represent the 68% and 90% confidence intervals. The ONS private sector AWE series has also been adjusted for furlough impacts over the 2020–21 period.

…and is expected to decline further in the remainder of 2025.

Annual private sector regular AWE growth is projected to slow to 3.5% in 2025 Q4, partly due to unusually strong wage growth at the end of 2024 dropping out of the annual comparison. Measures of private sector pay settlements for 2025, including the Bank’s pay settlements database, remain in the 3%–4% range, although the Agent’s contacts report that average pay settlements so far in 2025 are at the upper end of this range (Agents’ Summary of Business Conditions – November 2025 (ASBC)).

AWE growth is expected to be 3.6% in the first quarter of 2026 and then to ease a little further as spare capacity in the labour market continues to grow (Section 3.1). Early indications from the Agents’ contacts suggest that settlements could average around 3½% in 2026 (ASBC – November 2025). Firms responding to the most recent DMP Survey expected wage growth of 3.7% over the next year on average, suggesting some risk around the extent to which wage growth will slow.

Total labour costs have slowed by much less than wage growth, reflecting higher employer NICs.

Although wage growth has slowed, total labour cost growth, which comprises both wage and non-wage components, appears to have been more stable in recent months. The Bank’s Agents’ company visit scores suggest that a wedge has opened up between growth in firms’ reported pay and total labour costs, most likely reflecting higher employer NICs (Chart 1.4). That wedge is expected to narrow in coming months, however.

Some firms may attempt to absorb higher labour costs within their profit margins. Recent DMP Survey evidence points to reduced profit margins as the most common margin of adjustment to higher employer NICs, reported by 64% of firms surveyed in August to October. More broadly, margins appear somewhat compressed relative to 2019 levels and firms may seek to recover margins by raising prices, depending on the strength in demand (Box A).

Chart 1.4: A wedge appears to have opened between increases in total labour costs and increases in pay based on Agents’ company visit scores, but the gap is expected to narrow in 2026

Agents’ scores for pay and total labour costs ^(a)

• Source: Bank of England Agents.
• (a) After visiting companies, Agents assign company visit scores based on information gathered during the meeting. A score of +5 indicates a rapidly rising level, 0 indicates an unchanged level and -5 a rapidly falling level. Details on the scores can be found in Relleen et al (2013). The latest data points are for September 2025 and diamonds show expectations for a year ahead from July–September.

Underlying services disinflation has largely continued.

Although progress had slowed over recent months, higher-frequency measures of underlying services inflation generally moved lower in September, to around 3¼% on an annualised basis (Chart 1.5). Part of the slowing in these measures since the August Report reflects a slowing in annual private rental inflation, which declined from 6.7% to 5.5% between June and September. Consistent with that, underlying measures including rents, such as the low-variance and trimmed-mean measures, have fallen the most. Continuing pass-through of non-wage labour costs may limit how much services price inflation falls in the near term. But it is likely to fall more markedly next year, once these costs are passed through and reflecting past declines in wage growth.

Chart 1.5: Underlying services disinflation has largely continued

Measures of three-month average monthly annualised services price inflation ^(a)

• Sources: ONS and Bank calculations.
• (a) Measures shown are three-month averages of seasonally adjusted monthly annualised inflation. The low-variance measure is calculated by weighting each component of services inflation by the inverse variance of the change in 12-month inflation of that component from 12 months previously. The maximum adjusted weight is capped at twice its original value. Details on the components which have been included/excluded from the Services excluding indexed and volatile components, rents and foreign holidays measure are included in the accompanying spreadsheet published online. The trimmed-mean measure excludes the 10% largest and 10% smallest price changes. The latest data points shown refer to September 2025.

Inflation expectations

Households’ and firms’ inflation expectations have risen over the past year.

Short-term household inflation expectations have remained elevated at around 4% for the past six months (Chart 1.6, left panel), and currently stand around 1 percentage point higher than a year prior. Medium-term household expectations are also elevated.

Household inflation expectations appear to have risen by somewhat more than would have been predicted over the past year, based on the past relationship between expectations and other movements in the economy including inflation outturns (Box B). That could suggest that households have become more responsive to current CPI inflation, consistent with evidence that households pay closer attention to inflation during periods of high inflation and uncertainty (Weber et al (2025)). Recent Bank staff analysis extending Anesti et al (2025) also shows that household inflation expectations have become more sensitive to food and petrol prices, but remain relatively less sensitive to overall core inflation (Box E of the August 2025 Monetary Policy Report). As such, higher food price inflation is likely to have been one cause of the recent rise in household inflation expectations.

Firms’ inflation expectations have also increased over the past year, although by a little less than those of households. In the October 2025 DMP Survey, the three-month average of firms’ one-year and three-year CPI expectations were 0.8 and 0.3 percentage points higher than a year prior.

The median respondent to the latest Market Participants Survey expected CPI inflation one year ahead to be 2.3%, lower than the 2.5% reported in the September Survey. The median expectation for CPI inflation at the two-year horizon had fallen to 2.1%, from 2.2% previously, and had remained at the 2% target at the three-year horizon. Medium-term inflation expectations derived from financial markets, such as the RPI-reform adjusted measure of five-year, five-year forward inflation compensation, have drifted a little lower since the August Report and remain a little above pre-pandemic averages.

Chart 1.6: Households’ and firms’ inflation expectations have risen over the past year

Survey-based measures of household ^(a) and business inflation expectations ^(b)

• Sources: Citigroup, DMP Survey, YouGov and Bank calculations.
• (a) Data shown are from the Citi/YouGov survey and are based on responses to the questions: ‘How do you expect consumer prices of goods and services will develop in the next 12 months?’, and ‘And what do you think will happen to the prices of goods and services, on average, over the longer term - say five to ten years?’. Dashed lines represent the series averages over 2010–19. The latest data points are for October 2025.
• (b) Data shown are from the DMP Survey and are based on three-month averages of responses to the question: ‘What do you think the annual CPI inflation rate will be in the UK, one year from now and three years from now?’. The latest data points are for October 2025. The DMP Survey data have a short back-run, so no historical averages are shown.

1.2: Activity

Domestic demand

Underlying GDP growth remains subdued but is expected to pick up slightly in the near term.

Bank staff judge that underlying momentum in GDP, as measured by the collective steer from business survey indicators, has been subdued over recent quarters. Underlying GDP is estimated to have grown by 0.1% in 2025 Q3 (Chart 1.7). Part of this softness may reflect uncertainty ahead of the upcoming Autumn Budget, which appears to have weighed on some survey indicators. Underlying growth is projected to pick up slightly in Q4 to around 0.2%, consistent with modest improvements in some survey indicators of activity, including the October S&P Global Composite PMI.

Headline GDP growth has remained slightly higher than estimates of underlying growth over recent quarters (Chart 1.7). Headline GDP is projected to have grown by 0.2% in Q3, a little less than expected in the August Report. That reflects weaker-than-expected growth in exports to the US, as well as disruption linked to the Jaguar Land Rover cyberattack. Headline GDP growth is expected to pick up to 0.3% in Q4.

Chart 1.7: Underlying GDP growth remains subdued but is projected to pick up slightly in 2025 Q4

Quarterly growth in headline GDP and underlying growth implied by business surveys ^(a)

• Sources: Bank of England Agents, BCC, CBI, Lloyds Business Barometer, ONS, S&P Global and Bank calculations.
• (a) The final data point for quarterly headline GDP growth is for 2025 Q2, with diamonds for 2025 Q3 and Q4 showing Bank staff projections. Underlying GDP growth estimates are from a survey indicator model based on a Staggered Combination MIDAS approach (Moreira (2025)). The orange diamonds to 2025 Q2 show in-sample fitted values of the survey indicator model, and diamonds for 2025 Q3 and Q4 show out of sample projections. The orange swathe shows the interquartile range of estimates from individual survey indicators in the model.

Household consumption growth has been weak, with a limited recovery expected in the near term.

Downward revisions to household consumption growth in every quarter between 2022 Q3 and 2024 Q2 in Blue Book 2025 have left the current level of consumption only a little higher than in 2019 Q4. But nominal household income growth was revised down by a little more than consumption growth, leading to a slightly lower, albeit still elevated, household saving ratio over 2022–23. Box D explores a range of possible explanations for the recent weakness in consumption growth.

Consistent with the recent picture of weak underlying demand, household consumption growth was subdued in 2025 Q2, at 0.1%. Real household income growth was slightly stronger, such that the household saving ratio rose to 10.8% in Q2, having fallen back a little in Q1.

Consumer spending indicators point to consumption growth remaining relatively weak in the near term. Retail sales volumes in September rose to their highest level since 2022 but remain around 2% below their 2019 Q4 level. The headline index in the GfK consumer confidence survey remains below its historical average. And contacts of the Bank’s Agents do not expect a material improvement in consumer sentiment in the near term (ASBC – November 2025).

Expected falls in interest rates are nevertheless expected to support a gradual pickup in consumption growth over coming quarters, as households face reduced borrowing rates and lower incentives to save. But there are risks that this recovery could be weaker than expected, explored in Box D and Section 3.3.

Business confidence and investment intentions remain subdued.

Measures of business confidence have recovered a little over recent months but many remain weak, and contacts of the Bank’s Agents note that investment intentions are subdued (ASBC – November 2025 and Chart 1.8). Contacts report that weak demand and elevated uncertainty, including ahead of the Autumn Budget, may be causing firms to delay investment. Consistent with that, the proportion of respondents to recent DMP Surveys reporting that the overall level of uncertainty facing their businesses is high or very high has been around its highest level since end-2022.

The Bank’s Agents report that higher labour costs due to rises in the NLW and employer NICs have become a less prominent driver of investment intentions since the August Report. And concerns around international trade policy uncertainty have also eased.

Business investment fell by 1.1% on the quarter in 2025 Q2 but was 3% higher than its level a year ago. These data are volatile and can be subject to large revisions.

Chart 1.8: Business investment intentions are weak

Range of survey indicators of investment intentions ^(a)

• Sources: Bank of England Agents, BCC, CBI and Bank calculations.
• (a) Survey measures are scaled to match the mean and variance of four-quarter business investment growth since 2000. Measures for the Bank’s Agents (split by manufacturing and services), the BCC (non-services and services) and the CBI (manufacturing, distribution, financial services and business/consumer/professional services) are weighted together using shares in real business investment. The Agents’ measure shows companies’ intended changes in investment over the next 12 months, with the last available observation for each quarter shown. The BCC measure is the net percentage balance of respondents reporting that they have increased planned investment in plant and machinery and the data are not seasonally adjusted. The CBI measure is the net percentage balance of respondents reporting that they have increased planned investment in plant and machinery for the next 12 months. The final data are for 2025 Q2.

Labour market

Underlying employment growth remains close to zero.

A range of indicators suggests that underlying employment growth remains close to zero (Chart 1.9, left panel). That partly reflects subdued growth in underlying demand. Consistent with that, an estimate of employment growth implied by Bank staff’s estimate of underlying GDP growth fell a little over 2025 H1.

Evidence from business surveys suggests that increases in employer NICs and the NLW have also weighed on employment growth over recent quarters. Consistent with that, nearly half of the firms responding to the latest DMP Survey indicated that, in response to changes in employer NICs, they had already lowered employment by more than they would otherwise have done.

Contacts of the Bank’s Agents have noted that much of the adjustment in employment to increases in employer NICs and the NLW has now taken place (ASBC – November 2025). That said, some contacts indicated the potential for further adjustment in 2026, for example if there are lags in employment contracts being renewed or pay deals being bargained.

LFS data continue to suggest stronger employment growth than other measures, at 0.3% in the three months to August. But, although the quality of LFS estimates has steadily improved as sample sizes have increased, the ONS still flags difficulties in interpreting measures of change. As a result, the MPC continues to place less weight on LFS employment data compared with other employment indicators.

Indicators of employment intentions suggest that employment growth will remain subdued in the near term. The Bank’s Agents’ employment intentions score remains weak, albeit a little higher than in previous months, while the KPMG/REC survey hiring indices remain significantly below their historical averages.

Chart 1.9: Underlying employment growth remains close to zero, while the unemployment rate is projected to rise a little further in the near term

Estimate of underlying employment growth; ^(a) LFS unemployment rate and near-term projection ^(b)

• Sources: Bank of England Agents, DMP Survey, HMRC, KPMG/REC UK Report on Jobs, Lloyds Business Barometer, ONS, S&P Global and Bank calculations.
• (a) Bank staff’s indicator-based measure of underlying employment growth is constructed using a dynamic factor model, following the approach of Doz et al (2011). The model extracts a common component from monthly survey indicators, capturing comovements across series. The common component is scaled to align with LFS employment growth between 2000–19. The shaded area represents the 95% confidence interval. The latest data are for October 2025.
• (b) The projection for the unemployment rate is for 2025 Q3 and 2025 Q4. The projection is based on official data to August 2025. Although LFS unemployment data have been reinstated by the ONS, they are badged as official statistics in development and the LFS continues to suffer from low response rates, which can introduce volatility and potentially non-response bias (Box D of the May 2024 Monetary Policy Report).

Labour market conditions have continued to ease.

The latest LFS data indicate that the unemployment rate rose to 4.8% in the three months to August (Chart 1.9, right panel). That evidence of continued loosening in the labour market is broadly consistent with the Bank’s Agents’ scores for recruitment difficulties having largely normalised, following a period when recruitment difficulties were tight.

Job vacancies have fallen further since the August Report, with the reduction relatively broad-based across sectors. Together with the increase in unemployment, this has pushed the V/U ratio further below its estimated equilibrium level (Chart 1.10). The pace of decline in vacancies has started to flatten off over recent months, however. And the index of demand for staff has stabilised in recent KPMG/REC surveys, although it remains weak relative to its historical average. Net additional hours desired by workers as a proportion of their average hours worked, another indicator of labour market slack, are elevated compared with their historical average.

Bank staff judge that recent data are consistent with a small further loosening in the labour market in the near term. Although the outlook for employment is subdued, LFS redundancy rates remain relatively stable, and forward-looking HR1 notifications of potential redundancies among larger firms are only a little higher than their average since 2021. The unemployment rate is projected to continue to rise gradually, reaching 5% in 2025 Q4. Consistent with that, the V/U ratio is expected to fall slightly further below its estimated equilibrium level over coming quarters (Chart 1.10). Box E discusses risks around the near-term outlook for unemployment.

Chart 1.10: Labour market conditions have continued to ease, with the V/U ratio falling further since the August Report

V/U ratio and its estimated equilibrium level ^(a)

• Sources: Advertising association/World Advertising Research Centre Expenditure Report, ONS and Bank calculations.
• (a) The equilibrium V/U ratio is estimated using an error-correction model over the period 1982–2024. The real cost of vacancy posting and hourly labour productivity are included as long-run determinants for the level of vacancies. The model also includes controls for short-term movements in these variables (Stelmach et al (2025)). The final data points for the V/U ratio and the equilibrium V/U ratio are for 2025 Q2. The diamonds represent Bank staff projections for the V/U ratio and the equilibrium V/U ratio, respectively, for 2025 Q3 to 2026 Q1.

Spare capacity

The margin of spare capacity in the economy has continued to build gradually.

There remains a high degree of uncertainty around the current level of the output gap. But further loosening in the labour market, together with continuing weakness in demand, is consistent with the margin of spare capacity in the economy having continued to build gradually. That is corroborated by surveys of capacity utilisation, which suggest growing spare capacity within firms. And contacts of the Bank’s Agents continue to report that a modest degree of spare capacity has opened, reflecting subdued demand (ASBC – November 2025). Section 3.2 discusses risks around the current degree of spare capacity.

1.3: Global and financial conditions

Global economic activity

The world economy has been slightly more resilient than expected to trade developments, but global activity growth has nonetheless fallen a little.

As of 28 October, Bank staff estimate that the effective tariff rate on imports into the US was around 18%, 4 percentage points higher than at the time of the August Report. Meanwhile, the estimated effective US tariff rate on imports from the UK remained around 9%. Global trade policy uncertainty remains elevated, albeit below its peak in April 2025, as trade negotiations continue between the US and some of its major trading partners.

The global economy appears to have so far been a little more resilient to trade developments than expected. Temporary factors, such as front-loading of exports to the US, supported global trade earlier in 2025. And having fallen back a little in 2025 Q2 after tariffs started to come into effect, world trade is projected to have recovered over Q3. That is consistent with tentative evidence of trade rerouting from China through some south-east Asian economies, along with some trade diversion away from US markets.

Despite recent resilience to trade developments, as well as strong artificial intelligence-related investment, particularly in the US, UK-weighted world GDP growth is projected to have fallen slightly in 2025 Q3 (Chart 1.11). And global GDP growth is expected to remain below its historical average over the coming quarters, as the effects of tariffs and trade policy uncertainty build.

Chart 1.11: Global activity growth is projected to have fallen slightly in 2025 Q3

UK-weighted world GDP growth and GDP growth in selected countries ^(a)

• Sources: LSEG Workspace and Bank calculations.
• (a) The diamonds show Bank staff projections for UK-weighted world quarterly GDP growth, and for quarterly GDP growth in China, the US and the euro area. The projections are for 2025 Q4 to 2026 Q1 for Chinese GDP growth and for 2025 Q3 to 2026 Q1 for all other areas. The preliminary flash estimate for 2025 Q3 euro-area GDP growth was published after the cut-off for incorporation into the forecast so the data point for that quarter is a projection. UK-weighted world GDP growth is constructed using real GDP growth rates of 188 countries weighted according to their shares in UK exports.

Financial conditions

The market-implied path for Bank Rate was little changed relative to in the lead up to the August Report.

Based on the 15-day average of forward interest rates to 28 October, the market curve implied that Bank Rate would fall to 3.5% in 2026 H2, before rising a little by end-2028 (Chart 1.12).

The market-implied path for US policy rates was around 25 basis points lower, on average, over the next three years than in the period leading up to the August Report. The equivalent market-implied path for euro-area policy rates remained much lower than in the UK and US.

Chart 1.12: The market-implied path for policy rates was, on average, little changed in the UK, and had fallen back in the US

Policy rates and instantaneous forward curves for the UK, US and euro area ^(a)

• Sources: Bloomberg Finance L.P. and Bank calculations.
• (a) All data are as of 28 October 2025. The November 2025 curves are estimated based on the 15 UK working days to 28 October 2025. The August 2025 curves are estimated based on the 15 UK working days to 29 July 2025. The federal funds rate is the upper bound of the announced target range. The market-implied path for US policy rates is the expected effective federal funds rate. The ECB deposit rate is based on the date from which changes in policy rates are effective. The final data points are forward rates for December 2028.

Overall financial conditions are judged to have loosened a little since the August Report.

In the 15 days to 28 October, the sterling effective exchange rate was around ½% lower than in the lead up to the August Report, and sterling had depreciated by nearly 1% against the US dollar. Equity prices had continued to rise across advanced economies, with the S&P 500 index 6½% higher than its 15-day average in the August Report, while the FTSE All-Share index was up 5%. Equity valuations are judged to remain stretched in a historical context (October 2025 FPC Record). Corporate bond spreads have tightened in the UK but are little changed in other advanced economies. Taken together with movements in the yield curve, overall UK financial conditions are judged to be a little looser than at the time of the August Report.

Domestic credit conditions

Reductions in reference rates have passed through to lending rates, supporting a recovery in borrowing.

Reductions in Bank Rate and term OIS rates from their peaks over 2023–24 have passed through to household and corporate interest rates (Chart 1.13). Lending rates have generally adjusted in line with historical patterns over that period. But pass-through to sight deposits has been lower, as it was when Bank Rate was increasing. Term OIS rates increased a little after the August Report, leading to a slight pick-up in some fixed mortgage rates, but have since fallen back. Quoted rates on consumer credit lending, which typically respond with much longer lags, have fallen slightly for personal loans and are unchanged for credit card lending since the August Report.

The falls in lending rates from their peaks have supported a pickup in borrowing. Growth in household net borrowing has risen notably from its trough in early 2024, while growth in bank lending to corporates has also increased significantly over that period. As the main driver of money creation, that recovery in net lending has contributed towards stronger broad money growth over recent quarters. However, the ratios of aggregate and household broad money to nominal GDP and gross disposable income, respectively, remain below levels implied by their pre-pandemic linear trends. That could be consistent with a subdued outlook for activity and inflation (Box D of the May 2025 Monetary Policy Report).

An easing in credit supply conditions has also played a role.

Respondents to the Bank’s Credit Conditions Survey (CCS) have generally indicated increasing availability of credit to households and corporates since late 2023. Lenders responding to the 2025 Q3 CCS mainly attributed the most recent increase in secured credit availability to increased risk appetite, consistent with changes in their behaviour following the FCA’s statement on mortgage stress rates in March. And some lenders have recently taken up the PRA’s option to modify their LTI flow limit, following the FPC’s updated Recommendation in 2025 Q2 (October 2025 FPC Record). The spread between high and low LTV mortgage rates has narrowed since late 2024.

Chart 1.13: Most household and corporate interest rates have fallen over 2025

Household and corporate interest rates and their corresponding reference rates ^(a)

• Sources: Bank of England, Bloomberg Finance L.P. and Bank calculations.
• (a) Household loan and deposit rates are based on average quoted rates and business loan rates are based on average effective rates on new lending. The Bank’s quoted rates series are weighted monthly average rates advertised by all UK banks and building societies with products meeting the specific criteria. Introduction of new Quoted Rates data provides more information. The 75% and 90% LTV mortgage rates are for two-year fixed-rate products. The reference rate for these and fixed-rate savings bonds is the two-year OIS rate. The reference rate for £10,000 personal loan rates is the five-year OIS rate but this is not shown. The two-year OIS rate shows monthly averages, while Bank Rate shows month-end numbers. The provisional October 2025 data are shown in diamonds. For quoted rate series and the two-year OIS rate, these are based on average values to 28 October 2025. The provisional data point for Bank Rate is the rate as of 28 October 2025. The final business loan rate data are for September 2025.

2: Topical policy issues

The boxes in this section highlight some of the key pieces of analysis that informed the MPC’s discussions.

3: Outlook and risks

3.1: Central projection

The central projection is based on a staff proposal, which the majority of the MPC agrees is a reasonable baseline. It provides an important input into the MPC’s discussions and policy decision. This projection is, as always, uncertain. The key risks are set out in Section 3.2, with two specific scenarios in Section 3.3.

Conditioning assumptions

The November central projection, summarised in Table 3.A, is conditioned on a range of assumptions (detailed in the Report’s Projections Databank). That includes a market-implied path for Bank Rate which falls to 3.5% by the second half of next year, before rising a little towards the end of the forecast period, and the Government’s fiscal plans as set out in Spring Statement 2025.

Inflation

CPI inflation has risen over the past year, reaching 3.8% in September, and is projected to fall to close to 3% in coming quarters (Section 1.1). The fall is accounted for by a lower projected contribution of energy and food prices alongside an expected reduction in services inflation, as the effects of higher employer NICs and administered prices begin to fade and wage growth continues to ease. The central projection assumes the recent pickup in inflation will not lead to additional second-round effects on domestic inflationary pressures.

CPI inflation is projected to fall back further to around the 2% target in the medium term (Chart 3.1) as a margin of economic slack, partly reflecting the restrictive stance of monetary policy both now and in the past, pushes down inflation. The margin of slack acts against some continuing second-round effects in domestic prices and wages resulting from the 2022 peak in inflation. These second-round effects stop pushing inflation up by end-2027 as price and wage-setting normalises, but there are risks around that.

Annual growth in private sector regular AWE is expected to fall from 4.4% in the three months to August to 3.0% in 2027 Q2 where it broadly stays over the rest of the forecast period. The deceleration in wage growth occurs as looser labour market conditions restrain pay growth and as inflation expectations fall back alongside CPI inflation.

Higher global tariffs appear to have been only modestly disinflationary so far (Section 1.1), and their effects in the central projection are small.

Chart 3.1: CPI inflation is expected to decline and GDP growth to rise modestly in the medium term, while the unemployment rate picks up to just above 5% by mid-2026

Annual CPI inflation, GDP growth and the unemployment rate ^(a)

• (a) The fan charts depict the probability of various outcomes for GDP growth, the International Labour Organization (ILO) definition of unemployment, and CPI inflation. The uncertainty parameters determining the width of the fan charts have been calibrated to match the historical forecast errors since 2004 and now up to 2025 Q2 for each variable at different horizons but exclude errors during the pandemic given its exceptional nature. The fan charts are constructed so that outturns are expected to lie within each pair of lighter areas on 30 occasions, with outturns expected to lie within the fan on 90 out of 100 occasions. On the remaining 10 out of 100 occasions, outturns can fall outside the respective aqua, orange or purple areas of the fan chart, depicted by the grey background. For GDP growth, the distribution reflects uncertainty around past data revisions and future evolution, so that the mature estimate would lie within the darkest central band on only 30 out of 100 occasions. The Committee no longer uses the calibration of the fan chart skew to reflect judgements on the balance of risks to the central projection.

Activity

Four-quarter UK GDP growth is projected to fall a little in the near term, below its current level of 1.4%, before picking up (Chart 3.1). The pickup is driven by the lagged effect of recent interest rate cuts, the gradual loosening in monetary policy embodied in the market-implied path of interest rates, improvements in wider financial conditions, and higher global demand. Consumer spending, and an associated fall in the household saving ratio, more than accounts for the pickup in GDP growth.

As implied by the plans laid out in the Spring Statement 2025, the overall stance of fiscal policy continues to tighten. This weighs on GDP growth over the forecast period, particularly over the next year.

Although the global economy has so far been a little more resilient to trade developments than previously expected (Section 1.3), higher global tariffs and trade policy uncertainty are projected to weigh slightly on the level of global activity, resulting in lower growth over the coming year. Four-quarter UK-weighted world GDP growth declines from over 2% to 1.6% in early 2026, before picking up. The expected slowing in global growth pushes down slightly on the level of UK GDP.

A margin of spare capacity is judged to have opened up in the UK economy (Section 1.2). This is projected to widen a little further over the next year, as GDP growth is below estimated potential supply growth of around 1.4% a year, before starting to narrow. The margin of spare capacity is eroded fully by the end of the forecast period.

The labour market is continuing to loosen gradually, as subdued growth in output feeds through to labour demand. The unemployment rate is projected to peak at just over 5% in 2026 Q2. It is then projected to fall back over the second half of the forecast period, bringing it broadly in line with its estimated medium-term equilibrium rate of around 4¾%.

Comparison to the August 2025 central projection

The November projections are conditioned on a path for Bank Rate that is similar on average to August (Chart 1.12).

The central projections are little changed from August. CPI inflation is marginally lower in the near term reflecting lower-than-expected data outturns, while the projection in the medium term is little changed. There is a slightly higher projection for unemployment, which contributes to a wider margin of spare capacity than in August.

3.2: Risks

Monetary policy makers take into account a range of risks and uncertainties about the economic outlook when setting policy (Dhami et al (2025) and Haberis et al (2025)). The risks that have been most relevant to the MPC’s recent policy discussions are set out here.

Risks from inflation expectations

Several pieces of analysis summarised in this Report suggest that elevated inflation expectations pose a risk of greater inflation persistence than in the central projection (Section 3.1). A non-linear time series model finds that when inflation is above 3%–4%, it responds more strongly and persistently to economic shocks than when it is lower, driven by a stronger response of household inflation expectations to inflation (Box C). A machine learning approach indicates that household inflation expectations have made upward contributions to inflation in 2025 (Box B), although the loosening in the labour market may reduce the extent to which elevated household inflation expectations translate into higher wage growth going forward. Responses to the DMP Survey suggest that firms’ price-setting has become more sensitive to their own price expectations, which in turn have become more sensitive to news in inflation outturns.

Section 3.3 sets out a scenario in which persistently elevated inflation expectations affect wage and price-setting. This poses a risk to inflation that would be likely to require tighter monetary policy than otherwise.

Risks from consumption and labour demand

Some features of recent economic data indicate risks to demand. The household saving rate, which has picked up over the past few years (Chart 3.2), remains elevated. The pickup in consumption in the central projection remains dependent on a sustained fall in the household saving ratio. But there remains considerable uncertainty over this projection.

Chart 3.2: The household saving ratio has risen in recent years

Household saving ratio ^(a)

• Sources: ONS and Bank calculations.
• (a) The ratio is calculated as saving as a percentage of total available household resources. The ONS series is NRJS. The final data point shown is for 2025 Q2.

Various pieces of evidence suggest that the weakness in consumption could continue over coming years. Households may want to continue to rebuild wealth, which has fallen in real terms in recent years (Box D). The experience of the cost-of-living crisis may have persistently increased households’ desire to hold precautionary savings, which could be reinforced if households become more concerned about their employment prospects. And unemployment could rise by more than expected in response to lower demand (Box E).

Some of these risks are captured in the lower demand scenario set out in Section 3.3. The scenario explores the possibility that there has been a persistent shift in household behaviour to save more. This poses a risk to inflation which would be likely to require looser monetary policy than otherwise.

Risks surrounding structural shifts in supply capacity

There remains uncertainty around estimates of the current degree of slack in the economy. Models that put weight on recent price changes suggest that the economy currently has a margin of excess demand, whereas models based on developments in the labour market and in capacity utilisation suggest a margin of excess supply (Chart 3.3). If there is less slack than captured in the central projection, this could compound risks of inflation persistence.

Chart 3.3: There is uncertainty around the level of the output gap

Model-based estimates of the output gap ^(a)

• Sources: Bank of England Agents, BCC, CBI, HMRC, KPMG/REC UK Report on Jobs, ONS, S&P Global and Bank calculations.
• (a) The model is estimated over 2000–25 Q3 using the two-step estimator from Doz et al (2011), obtained from running the data through a Kalman filter and smoother once. The first factor of the dynamic factor model is interpreted as a measure of slack. The factor is then mean-variance adjusted to the MPC’s central output gap estimate over 2000–25 Q3. The labour market block is estimated using survey indicators of slack and the vacancy gap. The capacity utilisation block includes a range of surveys of capacity utilisation. The nominal block contains measures of pay and underlying inflation. The data are shown to 2025 Q3.

Uncertainty about slack also reflects risks related to labour market participation. The labour force participation rate has recovered, but recent data have to be treated with caution given continuing challenges associated with the LFS. And there is a risk that participation could fall again. Rates of remote working appear to have peaked, which could weigh on participation particularly among older workers, and participation rates of younger workers could remain weak (Box F).

Uncertainty about the NAIRU, the medium-term unemployment rate consistent with stable inflation, also contributes to uncertainty about slack. The NAIRU is estimated to have risen after the Covid pandemic. This could reflect lasting changes in wage and price-setting behaviour, resulting in increased real income resistance, following the major supply shocks experienced over recent years. Some models suggest that the NAIRU may have picked up further over recent quarters, which could be linked to increases in employer NICs and the NLW (Box F).

If labour market participation falls back, or if the NAIRU has risen by more than assumed in the central projection, the labour market could remain tighter even as labour demand falls. Negative labour supply shocks tend to have persistent impacts on inflation, and hence monetary policy may need to generate a degree of slack to squeeze out inflationary pressures resulting from structural changes in the labour market.

Risks around the restrictiveness of the monetary policy stance

The MPC uses a range of measures to assess the restrictiveness of monetary policy (Box A in the August 2025 Monetary Policy Report.) The degree of restrictiveness has fallen since its peak in early 2024, but recent evidence on balance suggests that the current monetary policy stance remains restrictive. However, there is significant uncertainty, and some models now suggest that the policy stance may have become neutral or slightly accommodative (Chart 3.4). All else equal, a less restrictive stance would imply that slack does not increase as much, which could allow domestic inflationary pressures to persist for longer.

Chart 3.4: There is uncertainty about the degree of monetary policy restrictiveness

Average real-rate gaps in November 2025 ^(a)

• Sources: Bank of England, Bank of England/Ipsos Inflation Attitudes Survey, Bank of England Market Participants Survey (MaPS), Bloomberg Finance L.P., Consensus Economics, Davis et al (2024), ONS, TradeWeb FTSE Gilt Closing Data and Bank calculations.
• (a) All measures of the real-rate gap presented in this chart show the implied degree of monetary policy restrictiveness over a three-year horizon. The macroeconomic models range is produced using estimates from a dynamic semi-structural IS curve model and one of the main models underlying the central projection in this Report (Albuquerque et al (2025)). The macrofinancial model range is estimated using the state-space model from Davis et al (2024), with a 95% confidence interval applied around the central estimates of r*. The financial market range uses estimates of the nominal neutral rate derived from three term premia models: the benchmark models in Malik and Meldrum (2016), Vlieghe (2016) and Meldrum and Roberts-Sklar (2015). The ranges for the MaPS show the 10th–90th percentile of perceptions of the average implied real-rate gaps over a three-year horizon. For more detail on the approach, refer to Box A in the August 2025 Monetary Policy Report.

Global risks

The UK is an open economy that is often heavily affected by global shocks. A key global development this year has been the US government announcing a range of new tariffs. Early evidence suggests that these are having a relatively limited effect on global growth and a slightly disinflationary impact on the UK, driven mainly by trade diversion (Section 1.1). But it is too early to judge whether this reflects diminished or merely delayed effects of trade policy changes. Front-loading is likely to have boosted US imports in recent months, but this should fade if tariffs remain in place. Strong investment in artificial intelligence-related goods and services, particularly in the US, may also have supported recent global activity and masked an underlying drag from trade policy.

The geopolitical environment remains volatile, and future shocks could plausibly push up or down on UK inflation. Geopolitical tensions could result in new commodity price spikes or supply chain disruptions, which may require a relatively forceful monetary policy response in the context of still elevated domestic inflationary pressures. Meanwhile, global sovereign yield curves have steepened this year, with concerns over fiscal sustainability pushing up the compensation investors require to hold longer maturity bonds. Market concerns about sovereign debt in some countries could intensify further and lead governments to implement fiscal consolidation measures, which could weigh on global demand.

The economic impacts of any future shocks could be amplified by limited fiscal space in many countries, as well as by a possible correction in risky asset prices. Equity valuations appear to be stretched in an historical context, particularly for technology companies focused on artificial intelligence, leaving equity markets exposed to a correction should expectations around the impact of AI become less optimistic (October 2025 Financial Policy Committee Record). A resulting reduction in global demand could reduce inflationary pressures in the UK.

3.3: Scenarios

To explore some of the risks around the economic outlook in more depth, this section sets out two alternative scenarios informed by the analysis in the Report. These scenarios are designed to provide an illustrative quantification of how alternative economic mechanisms could result in plausible different paths for the UK economy. They are neither all-encompassing nor mutually exclusive. The scenarios were not chosen based on their perceived likelihood but for their relevance to current policy discussions, although their role in individual MPC members’ policy judgements will differ as set out in the MPC’s November minutes.

Several mechanisms could lead to higher inflation persistence. The inflation persistence scenario set out in the Report explores how past inflation outturns could continue to affect wage and price-setting in the medium term.

In the central projection, second-round effects in wage and price-setting are judged to dissipate over the first half of the forecast period. But there are several mechanisms that could generate additional inflation and wage persistence, including possible structural changes to price-setting and the wage bargaining process. The mechanism explored in this scenario builds on the observation that the large inflationary shocks in recent years have resulted in some movement of households’, and to a lesser extent firms’, longer-term inflation expectations. It could take some time for these expectations to normalise, and they could generate additional inflation persistence beyond the first half of the forecast period.

For a higher inflation persistence scenario, Bank staff have adjusted COMPASS, a macroeconomic model used as a key input to produce the central projection, to allow past outturns of inflation to influence temporarily households’ and firms’ inflation expectations. These expectations then feed into price and wage-setting through the domestic price and wage Phillips curves in the model. This adjustment process was informed by a range of inflation expectations measures and their relationship with trend inflation. The mechanism allows households’ and firms’ experience of inflation over the past few years to affect their current and future wage and price-setting behaviour. This allows for more persistent medium-term impacts of inflation expectations on inflation dynamics than the second-round effects scenario in the May 2025 Monetary Policy Report.

In this scenario, the disinflation process is materially slower than in the central projection. Should the economic mechanisms explored in this scenario unfold, a greater margin of slack would be required to ensure that inflation returns to the 2% target in the medium term. This would need to be achieved by a tighter monetary policy stance.

The weight a policymaker might place on this scenario is likely to interact with judgements about the outlook for the labour market – a loosening in the labour market may reduce the influence of households in the wage bargaining process for example – as well as potential structural changes to the wage bargaining process explored in Section 3.2.

In a weaker demand scenario, domestic inflationary pressures fade more quickly than in the central projection, driven by more persistent consumption weakness.

In the central projection, household consumption picks up and the saving ratio falls back. But several mechanisms could give rise to a weaker path for consumption. Households may want to save more to rebuild wealth, or because of higher expected uncertainty about future income. Savings intentions could also increase if households become concerned about their employment prospects as the labour market weakens. And there may have been a persistent increase in household risk aversion, leading them to save more for precautionary reasons.

The weaker demand scenario in this Report explores the latter mechanism. Recent experiences of large adverse macroeconomic shocks to real incomes and wealth could have persistently raised households’ risk aversion, resulting in a desire to build up greater precautionary savings. This would be in line with several studies which find that consumption and saving behaviour can be shaped by households’ prior lifetime experiences (Aizenman and Noy (2015), Guiso et al (2018), Malmendier and Shen (2024)). The scenario explores the possibility that some of the strength in savings in recent years was driven by higher household risk aversion, rather than by other demand shocks or the impact of higher interest rates. And because higher risk aversion is assumed to persist, consumption remains weaker than in the central projection even as interest rates are reduced.

Bank staff have used a Heterogeneous Agent New Keynesian (HANK) model calibrated to the UK economy to run the scenario simulations. This model explores households’ consumption and savings decisions in detail by allowing for household-specific income shocks, borrowing constraints and housing choices. For this scenario, household risk aversion is assumed to be higher to an extent that can account for around one third of the rise in the household saving ratio since 2022. This requires an increase in the risk aversion parameter that nevertheless remains well within the range of standard values in the literature. As higher risk aversion persists, the saving ratio in this scenario remains broadly flat over the forecast period, rather than declining as in the central projection.

Consumption growth in this scenario is materially weaker than in the central projection. Firms’ labour demand declines in response to households’ reduced desire to consume, leading to a fall in real wages and therefore firms’ production costs. This in turn reduces domestic inflationary pressures. The disinflationary effects of greater slack in this scenario are amplified by the fact that households’ desire to save more also increases their labour supply, which puts additional downward pressure on wages. Overall, the output gap widens and inflationary pressures fade more quickly than in the central projection, requiring a looser monetary policy stance all else equal.

Monetary policy would be required to respond if either scenario were to materialise, to ensure that inflation returns to the 2% target in the medium term.

In the construction of these scenarios, Bank Rate follows a path implied by a set of mechanical policy rules (detailed in Annex 1). Rules-based simulations of policy rates are not a prescription for how policy would evolve were a particular scenario to unfold, but they can provide a useful benchmark against which to assess how monetary policy might change in that scenario relative to the central projection. To enable that comparison, the central projection is shown under comparable mechanical policy rules.

Charts 3.5 to 3.8 below show Bank Rate, CPI inflation and the output gap under two rules, for each scenario and the central projection. Both are Taylor-type rules, in which the interest rate is a function of the deviation of inflation from target and the deviation of output from potential. In the contemporaneous Taylor-type rule, policy responds to current inflation and the output gap, whereas in the forward-looking rule it responds to the expected values of these variables five quarters ahead. The forward-looking Taylor-type rule based on the central projection (the dashed orange line in Chart 3.5) delivers a path for Bank Rate that is slightly below the market curve (the dotted purple line in Chart 3.5). Across both scenarios and the central projection, the contemporaneous Taylor-type rule calls for higher Bank Rate than the market curve or the forward-looking Taylor-type rule in the near term, as it leans strongly against currently elevated inflation. But the contemporaneous rule then falls below the forward-looking rule in the medium term, such that the overall monetary policy stance implied by both rules is similar.

In the inflation persistence scenario, there is a trade-off between above-target inflation and a negative output gap. Based on the policy rule paths shown in Chart 3.5, Bank Rate is somewhat higher in this scenario than under the central projection by the end of the forecast period (the difference between the solid and dashed lines in the chart).

In contrast to the comparable central projections, where inflation returns to just above its 2% target under either rule, in this scenario inflation remains materially above target, at around 2.5%, in three years’ time (Chart 3.6, left-hand panel). In reality, the Committee would need to consider pursuing a more forceful monetary policy response than suggested by either of these rules to prevent such an extended period of above-target inflation.

Chart 3.5: In an inflation persistence scenario, illustrative Taylor-type rules imply that policy would be somewhat tighter than under a comparable central projection

Evolution of Bank Rate in an inflation persistence scenario ^(a)

• Sources: Bloomberg Finance L.P. and Bank calculations.
• (a) To enable meaningful comparison between a scenario and the central projection, they need to be shown on a comparable basis. While the central projection is conditioned on the market path for interest rates, Charts 3.5 to 3.8 and Annex 1 show versions of the central projection conditioned on alternative paths for interest rates using several policy rules. These should not be interpreted as a prescription for how policy is likely to evolve.

In the weaker demand scenario, based on the policy rules shown in Chart 3.7, Bank Rate is somewhat lower at the end of the forecast period than under the central projection (the difference between the solid and dashed lines in the chart). This lower path for Bank Rate would serve to support demand, although demand remains somewhat weaker overall than in the comparable central projection (Chart 3.8, right panel). Inflation is also lower in the medium term than in the comparable central projection (Chart 3.8, left panel). The forward-looking rule front-loads rate cuts in the early part of the forecast period, whereas the contemporaneous rule postpones them until the latter half.

Chart 3.7: In a weaker demand scenario, illustrative Taylor-type rules imply that policy would be materially looser than under a comparable central projection

Evolution of Bank Rate in a weaker demand scenario ^(a)

• Sources: Bloomberg Finance L.P. and Bank calculations.
• (a) Refer to Chart 3.5.

Annexes

• Annex 1: Model-based policy simulations

• Annex 2: Monetary policy since the August 2025 Report

  At its meeting ending on 17 September 2025, the MPC voted by a majority of 7–2 to maintain Bank Rate at 4%. Two members voted to reduce Bank Rate by 0.25 percentage points, to 3.75%. The Committee voted by a majority of 7–2 to reduce the stock of UK government bond purchases held for monetary policy purposes, and financed by the issuance of central bank reserves, by £70 billion over the next 12 months, to a total of £488 billion.

  There had been substantial disinflation over the past two and a half years, following previous external shocks, supported by the restrictive stance of monetary policy. That progress had allowed for reductions in Bank Rate over the past year. The Committee remained focused on squeezing out any existing or emerging persistent inflationary pressures, to return inflation sustainably to its 2% target in the medium term.

  Underlying disinflation had generally continued, although with greater progress in easing wage pressures than prices. Twelve-month CPI inflation had been 3.8% in August, and had been expected to increase slightly in September, before falling towards the 2% target thereafter. The Committee remained alert to the risk that the temporary increase in inflation could put additional upward pressure on the wage and price-setting process. Pay growth remained elevated, but had fallen and was expected to slow significantly over the rest of the year. Services consumer price inflation had been broadly flat over recent months. Upside risks around medium-term inflationary pressures remained prominent in the Committee’s assessment of the outlook.

  Underlying UK GDP growth had remained subdued, consistent with a continued, gradual loosening in the labour market, as well as a margin of slack in the economy. Downside domestic and geopolitical risks around economic activity remained.

Glossary and other information