Bank of England — Monetary Policy Report (UK, 2025)

Bank of England Monetary Policy Report Monetary Policy Committee November 2025 This edition of the Monetary Policy Report is dedicated to the memory of our colleague Pavandeep Dhami. Pav's insight and commitment shaped both this document and, over more than a decade, the Bank's wider work to support monetary policy. His quiet wisdom and gentle humour left a lasting mark on all who worked with him, and his loss is deeply felt. Monetary policy at the Bank of England The objectives of monetary policy The Monetary Policy Committee (MPC) sets monetary policy to keep inflation low and stable, which supports growth and jobs. Subject to maintaining price stability, the MPC is also required to support the Government s economic policy. The Government has set the MPC a target for the 12-month increase in the Consumer Prices Index of 2%. The 2% inflation target is symmetric and applies at all times. The MPC s remit recognises, however, that the actual inflation rate will depart from its target as a result of shocks and disturbances, and that attempts to keep inflation at target in these circumstances may cause undesirable volatility in output. The Monetary Policy Report The MPC is committed to clear, transparent communication. The Monetary Policy Report is a key part of that. We have made some changes to the structure and content of the Report so that it reflects better the wide range of inputs that are informing monetary policy, as explained in this Quarterly Bulletin article. The purpose of the document is to set out the analysis that informed policy discussions. The Report is produced quarterly by Bank staff under the guidance of the members of the MPC. It has been prepared and published by the Bank of England in accordance with section 18 of the Bank of England Act 1998. The Monetary Policy Committee   Andrew Bailey, Chair   Sarah Breeden   Swati Dhingra   Megan Greene   Clare Lombardelli   Catherine L Mann   Huw Pill   Dave Ramsden   Alan Taylor Page 1Bank of England PowerPoint  versions of the Monetary Policy Report charts and Excel spreadsheets of the data underlying most of them are available at http://www.bankofengland.co.uk/monetary- policy-report/2025/november-2025. The  Projections Databank  is an additional Excel spreadsheet containing a wide range of information relating to the central projection, as well as projections for the scenarios.   Bank of England 2025 ISSN 2633-7819 Page 2Bank of England Contents Monetary Policy Summary Monetary Policy Overview 1: Current economic conditions 1.1: Inflation 1.2: Activity 1.3: Global and financial conditions 2: Topical policy issues Box A: Developments in firms  costs and margins Box B: Inflation expectations and their role in wage and price-setting Box C: Prospects for CPI inflation when inflation is high Box D: Risks around the outlook for household consumption Box E: The risks of a sharper rise in unemployment Box F: Structural changes in the labour market 3: Outlook and risks 3.1: Central projection 3.2: Risks 3.3: Scenarios Annex 1: Model-based policy simulations Annex 2: Monetary policy since the August 2025 Report Glossary and other information 4 5 9 9 18 25 30 30 35 40 45 49 53 60 60 63 68 74 74 75 Page 3Bank of England 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. Page 4Bank of England 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. Page 5Bank of England 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 har