Analysis of the Bank of England's November 2025 Monetary Policy Report: Key Takeaways and Implications

The MPR distills recent data into a coherent narrative of easing but uneven disinflation, framed by the central projection in Section 3.1 and alternative scenarios in 3.3. Interest Rate and Monetary Policy Decisions The MPC's 5–4 vote to hold Bank Rate at 4% highlights internal divisions, with dissenters citing sufficient disinflation evidence for an immediate cut. Market-implied paths suggest a fall to 3.5% by mid-2026, aligning with gradual easing if wage/services pressures abate. Key judgment: Further cuts depend on balanced risks, with December reassessment pending more data. Inflation Projections CPI peaked at 3.8% in September 2025 (from 3.6% in June), with 0.4 pp each from administered prices (e.g., Vehicle Excise Duty) and food/tobacco, plus 1 pp from labor costs via services/goods passthrough. Projections (Chart 1.1) forecast 3.2% by March 2026—over half from energy bill falls—easing to 2% medium-term, assuming no NIC repeat and fading second-round effects by end-2027. Services inflation dips to 4.3% (from 4.7%), AWE growth to 3.0–3.5% by 2027. Global tariffs contribute modestly to subdued import prices (~flat YoY). August forecasts were upwardly revised near-term but matched medium-term.

Unemployment rose to 4.8%, projected to peak at 5% in Q2 2026 before 4.75% equilibrium, with vacancies falling broad-based (V/U below equilibrium). Participation recovered to pre-pandemic levels (driven by 50+ cohort), but NAIRU rose post-pandemic (hysteresis, matching inefficiency, NICs/NLW). Slack builds gradually, corroborated by capacity utilization surveys; structural shifts risk embedding wage rigidity. Global and External Factors World GDP growth dips to 1.6% early 2026 (below historical avg.), resilient to tariffs via rerouting (e.g., China to UK/EU) but weighed by uncertainty. Energy prices fell (oil $64/bbl, gas -6%), aiding disinflation; food inflation at 4.5% (from global ag +5%). Geopolitics pose upside risks to commodities/supply chains.

Overall UK Economy

The Bank of England thinks the risks are “balanced”, but growth will stay very weak: only about 1.4% for the whole of 2025. Why so sluggish?

1. The government is raising taxes and cutting some spending (“fiscal tightening”) → this slows the economy by roughly 0.1–0.2 percentage points.
2. Possible new import taxes/tariffs from the US or elsewhere → another small drag of 0.1–0.2 pp.
3. Lower interest rates from the Bank of England will help a bit, but they only just cancel out the bad stuff above.

If people and companies get more scared than expected and cut spending even more, the economy could have a bigger “output gap” (i.e. running about 1% below its potential). That feels like a mild recession and can become self-fulfilling because everyone loses confidence.

Inflation (prices going up)

Good news: inflation is coming down and should get back to the 2% target. But there are still worries it could stay too high for longer because:

1. Workers’ wages and services prices are still rising quite fast.
2. People think prices will keep going up a lot → households expect 4% inflation, companies expect 2.3%.
3. If actual inflation goes above 3%, people panic and it can stick higher for longer.

Two possible stories:

1. Inflation stays sticky → Bank of England has to keep interest rates higher for longer → ends up at 2.5% instead of 2%.
2. Economy is weaker than expected → lots of spare capacity → inflation falls faster than 2% and rates can come down more quickly.

Households and Ordinary People

1. The worst of the cost-of-living squeeze is over (inflation peaking helps).
2. But unemployment is expected to rise to around 5%, so some people will lose jobs or feel worried about losing them.
3. Many families are still saving a lot of money “just in case” or because house prices aren’t falling → this means they’re not spending much (consumption grew only 0.1% in spring 2025).
4. The recent National Insurance increase (NICs) will cost the average household about £500 a year more in tax → less money for shopping, holidays, new cars, etc.

Businesses and Investment

Wages are no longer shooting up, so company profit margins are getting a bit better. But because demand is weak, firms are:

1. Cutting jobs or not hiring.
2. Putting off new factories, machines, software, etc. → business investment actually fell 1.1% in spring 2025. Some exporters might do a bit better if trade gets diverted from other countries, but overall companies are nervous and not investing much.

Policymakers (Bank of England) and Financial Markets

1. The Bank is signalling it will keep cutting interest rates slowly and steadily → this calms everyone down and borrowing costs are already falling a bit.
2. Markets currently expect the Bank Rate to be around 3.5% by the middle of 2026.
3. But if things go wrong (inflation too high or economy too weak), interest rates could swing quite a lot → markets hate surprises.
4. The big message: the Bank of England and the Government really need to work together. If the government keeps tightening taxes/spending too much while the Bank is cutting rates, they could accidentally slow the economy more than needed.

The Two Main Risks

1. Upside risk to inflation → inflation stays “sticky” because people remember the last few high-inflation years → Bank has to raise or keep rates higher → growth even weaker.
2. Downside risk → demand collapses because people keep saving too much → lots of unemployment → inflation falls fast → Bank can cut rates a lot.

Extra dangers: sudden war or geopolitics, or another big jump in oil/gas/food prices, would make everything worse.