7 November 2025: Bailey cast the decisive vote for a hold

As predicted, yesterday's meeting of the Bank of England’s Monetary Policy Committee confirmed that rate setters are hopelessly split about the correct level of interest rates to both bring inflation under control and promote growth in the economy.

The vote was 5-4 in favour of leaving rates unchanged, with Governor Andrew Bailey providing the casting vote.

Following the announcement of the decision, Bailey told a press conference that inflation appears to have passed its peak and that “there could be an AI bubble.” “We need to wait and confirm that the path of inflation decline is more firmly established before considering further reductions in bank rates,” he noted.

Regarding AI, Governor Bailey said, “AI has the potential to be the next major driver in terms of productivity,” adding, “In my personal view, I believe there is a significant possibility of that happening.”

However, he noted, “There is still a considerable way to go before it is actually proven,” and “at the same time, there could be a bubble.” He explained, “The market is pricing in future earnings streams, and that is uncertain,” and added, “We are naturally monitoring the implications for financial stability and the potential spillover effects on the broader economy.”

UK interest rates are on a “gradual downward path,” but that may not last much longer.

That was the key message Bank of England governor Andrew Bailey gave as he presented a new-look set of economic forecasts, offering more clarity than the Central Bank has given on rate-setters’ view of the future path of policy.

For the first time, members of the Monetary Policy Committee set out the rationale underpinning their individual votes after deciding by the thinnest majority to leave the BoE’s benchmark rate on hold at 4 percent.

Bailey wrote that current market pricing implying two further rate cuts to leave the Bank rate at 3.5% in three years was “a fair description of my position at present”. He added that market pricing gave “a reasonable view of a sensible path”.

The newly appointed Deputy Leader of the Labour Party has said the Government should not rip up its manifesto promises over tax hikes, amid mounting speculation it is preparing to do so in the Budget.

Lucy Powell, who was sacked from Sir Keir Starmer’s Cabinet in September before winning the deputy leadership election last month, said “we should be following through on our manifesto, of course”.

She suggested breaking the pledge not to raise income tax, national insurance, or VAT would damage “trust in politics”.

Powell said the highly anticipated Budget should be about “putting more money back into the pockets of ordinary working people”. She added: “That’s what that manifesto commitment is all about. And that’s what this Budget will be about, I’m sure.”

She went on to tell the BBC: “We must stand by the promises that we were elected on and that we do what we said we would do.”

The Manchester Central MP also called for the two-child benefit cap to be lifted “in full” as a matter of urgency.

The pound reacted to the rate decision by retracing the steps it made earlier in the week, It climbed to a high of 1.3142 and closed at 1.3136.

The Federal Reserve’s recent stance on interest rates faces new challenges after the release of the October Challenger job cuts report. The data, showing significant layoffs and a weak job market, contrasts sharply with Chairman Jerome Powell’s previous comments about the strength of the labour market. As markets react to the unexpected job losses, all eyes are now on the Federal Reserve to assess the situation and determine its next steps.

According to Challenger, the increase in job losses stems from several factors, including the growing adoption of artificial intelligence, rising corporate costs, and reduced consumer spending.

Central Bankers within the G7 are split about the effect that AI will have on their respective economies. Fed Chair Jerome Powell believes it will be an “eventual boom” in productivity, while Andrew Bailey said yesterday that the threat to jobs remains, since nothing has been reported to the contrary has been reported.

“The surge in layoffs comes as AI adoption and tightening corporate budgets have resulted in hiring freezes and workforce reductions,” Challenger noted. Furthermore, the data showed that individuals who have been laid off are facing increasing difficulty in securing new roles, which could further loosen the labour market.

The year-to-date tally for job cuts has now surpassed 1 million, a level not seen since the height of the 2020 pandemic. The number represents a 65% increase over the same period last year. This surge in layoffs raises concerns about the overall health of the labour market, which had previously shown signs of resilience.

The Challenger report also revealed that hiring activity in October was weak, with only 372,520 hiring plans. This is the lowest monthly hiring total since Challenger began tracking this data in 2012. These figures reflect the broader economic slowdown, driven by persistent inflation and rising operational costs.

Speaking at the National Association for Business Economics seasonal meeting, Federal Reserve Bank of Philadelphia President Anna Paulson stated that “tariffs will increase the price level, but they won’t leave a lasting imprint on inflation.” Paulson added that “monetary policy should be looking through tariff effects on prices.”

Paulson stressed that she reached “this conclusion with an awareness that we need to be careful,” and stated that she will make policy decisions “cautiously.”

She cited several factors contributing to her views on tariffs and inflation, including anchored inflation expectations, smaller-than-expected price increases from tariffs, and firms not passing on increased costs to consumers to maintain market share.

In her remarks, Paulson stated, “Given my views on tariffs and inflation, monetary policy should be focused on balancing risks to maximum employment and price stability, which means moving policy to a more neutral stance.”

Paulson said that the Federal Open Market Committee’s decision to cut rates by 25 basis points in September “made sense” against the backdrop of increasing labour market risks.

Several of her colleagues on the FOMC spoke yesterday about their views on monetary policy. Those speeches portrayed the problems facing Jerome Powell as he seeks to present a united view amid contrasting views on inflation versus growth.

The dollar index would typically be driven by predictions about the employment report during the first week of a new month. Since traders have been stripped of that data, they have given greater importance to numbers that generally serve as “hors d’ouvre” to the main event.

Yesterday, the index fell back to a low of 99.67 and closed at 99.71.

There is currently a sense of optimism pervading financial markets that the ECB may have finally got it right, not without a massive dose of luck, in both ending the threat of inflation and promoting economic growth.

Almost every prediction about the future path for interest rates shows that the Bank’s headline rate will stay unchanged throughout the whole of next year.

Looking more closely at the countries that are providing that optimism, Spain stands out as the “shining light,” while Germany, France, and, to a lesser extent, Italy struggle with their own internal issues.

Spain's HCOB Services PMI jumped to 56.6 in October, up from 54.3 the month before, firmly signalling expansion. This was primarily fuelled by local demand, as domestic customers kept order books healthy despite weaker global trends.

Hiring hit its fastest pace since July, and even manufacturers joined in, with factory activity picking up speed last month. Business optimism climbed to a seven-month high, even amid ongoing cost pressures from wages, fuel, and energy. HCOB now thinks Spain's private sector momentum could help lift GDP by nearly 3% next year, likely outshining most other major European economies.

Spain’s bright services pulse is standing out in the eurozone, and that’s already shifting investor sentiment. Upbeat growth signals and a revised government GDP forecast of 2.7% could keep drawing international investment and support shares of consumer and travel-driven companies.

While many European countries wrestle with sluggish growth, Spain is carving out its own lane thanks to booming tourism, substantial job gains, and robust consumer demand. As long as rising costs don’t bite too hard, Spain's resilient mood might keep it ahead in a cloudy global outlook.

Meanwhile, back in the real world, the European Central Bank is still far away from resuming debt purchases to inject liquidity into the banking system as it first needs to work off more of the bonds it bought over a decade of easy policy, ECB board member Isabel Schnabel said on Thursday.

The ECB has been slowly mopping up some of the trillions of euros it pumped into the financial system under several bond-buying schemes in 2015-22, when it was trying to revive inflation that was then too low.

Isabel Schnabel, who is in charge of the ECB's markets operations, said this ongoing "quantitative normalisation" process will continue until she and her colleagues on the Governing Council deem enough bonds have run off the central bank's balance sheet.

"Purchases under the new portfolio will only start once the liquidity injected through our legacy monetary policy bond portfolios and the net financial asset position falls short of covering the share of reserves the Governing Council decided to provide through securities holdings," Schnabel said.

"Passive balance sheet run-off implies that this point is still far away."

She reaffirmed the new purchases should be focused on short-term bonds, not least to protect the ECB from further losses if interest rates rise. This implies that Schnabel is among those still living in fear of inflation's return, which would precipitate a return to tighter monetary policy.

The Euro made significant gains yesterday but failed to gain much traction. It rose to a high of 1,1552 and closed at 1.1542. It is not difficult to imagine the euro challenging resistance at 1.1780 had the American Federal Government not been affected by the current shutdown.

Have a great day!