The Bank said it would shrink its balance sheet by £70bn in the year ahead, a slower pace than the £100bn reduction of last year.
In an open letter to Mr Bailey, Ms Reeves admitted that inflation was too high but blamed international factors for the increase.
She added: “The Prime Minister and I recognise that we must do everything in our powers to keep costs down and lower them, and we have asked Cabinet to work with their officials to look at what further action can be taken ahead of the Budget in November. Low and stable inflation is essential for long-term economic growth and sustained increases in living standards.”
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The recent spike in inflation is “still expected to be temporary”, according to Andrew Bailey, the Bank of England Governor.
In a letter to the Chancellor, Mr Bailey wrote: “The recent increase in CPI inflation has owed largely to food prices and
administered prices, including water bills and Vehicle Excise Duty.”
He added that food inflation had added around 0.4 percentage points to the level of inflation in August, as global food prices climbed.
Figures from the Office for National Statistics released on Wednesday showed that inflation remained at 3.8pc in August, the same level as in July and a 19 month high.
Rachel Reeves’s decision to increase employers’ National Insurance Contributions and increase the minimum wage in last year’s autumn Budget has also been blamed for pushing up inflation. Businesses said they had been left with no choice but to pass on the extra costs to consumers.
In his letter to the Chancellor, Mr Bailey explained the tax rise had postponed a decline in labour cost growth.
He wrote: “A reduction in total labour cost growth also appears to have been delayed by the increase in employer National Insurance Contributions (NICs) and pay growth in sectors with a large share of employees at or close to the National Living Wage (NLW).”
In a letter to Bank of England Governor, Andrew Bailey, Rachel Reeves said government officials were examining measures to lower inflation ahead of the upcoming autumn Budget.
Ms Reeves wrote: “The Prime Minister and I recognise that we must do everything in our powers to keep costs down and lower them, and we have asked Cabinet to work with their officials to look at what further action can be taken ahead of the Budget in November.
“Low and stable inflation is essential for long-term economic growth and sustained increases in living standards.”
It comes as official figures released on Wednesday showed that inflation remained at 3.8pc in August. Bank of England forecast expect inflation to rise to 4pc in September.
The Governor of the Bank of England and the Chancellor are required to send a letter to each other when the inflation is 1pc above or below the 2pc target.
Bank of England policymakers are likely to cut rates slowly at it heads towards a neutral policy rate, according to Oxford Economics.
Andrew Goodwin, chief UK economist at Oxford Economics, said the minutes from today’s meeting show that most members of the Monetary Policy Committee (MPC) “are more worried about cutting too quickly than too slowly”.
Mr Goodwin added that he expects the MPC to hold the bank rate at 4pc for the rest of the year, with the next rate cut to take place in 2026.
He said: “By then, the MPC will likely have to factor in the prospect of tighter fiscal policy. We expect growth to miss the BoE’s forecasts.
“And we think there will be better news on wages and inflation, with it becoming apparent to the MPC that the increase in NICs has played a bigger role in this year’s stickiness in services inflation.”
Oxford Economics expects the Bank to make just two rate cuts in 2026, brining the bank rate to 3.5pc by the end of next year.
Economists at ING have said that the timing of future cuts looks less clear but still expects two to three more rate cuts from the Bank.
James Smith, a developed markets economist at ING, said: “given that not much has changed since the August meeting that would have warranted a more major shift in stance today.”
He explained that recent data on the UK labour market and inflation had largely been in line with projections from the Bank.
Mr Smith said: “August’s decision made it abundantly clear that the Bank is growing more reticent to cut rates further from here.”
The Bank’s policymakers will meet again on November 6 to decide whether to make another rate cut, but the decision “looks 50-50” to economists at ING.
The current level of inflation remains a ‘source of discomfort’ for rate setters at the Bank of England, according to economists at Investec.
Official figures released by the Office for National Statistics on Wednesday showed that inflation remained at 3.8pc in August, the same as it was in July.
Ellie Henderson, from Investec, said: “There does seem to be greater concern than last month that this [current inflation levels] could feed through into persistently higher inflation expectations.”
She added the Bank’s job of returning inflation to its 2pc target could be made “more difficult” if current high inflation levels embed themselves into wage setting.
Rachel Reeves must show “spending restraint” to bring down the cost of government borrowing, a think tank has warned.
The Institute of Economic Affairs said the Bank of England had taken “sensible” measures to reduce the pace of its quantitative tightening programme as it held interest rates at 4pc.
Executive director Tom Clougherty said: “It is hard to make a case for a more aggressive loosening of monetary policy while measured inflation remains stubbornly high.
“However, growth in broad money is low, which suggests that price rises are coming from supply-side factors – like taxes and regulatory restrictions that drive up costs.
“That is regrettable, but not something the Bank can or should do much about.
“What we really need now is spending restraint and a much more ambitious pro-growth agenda from the Government.”
Rachel Reeves urged the Bank of England to “liaise closely” with UK officials over its plans to sell UK bonds after policymakers voted to scale back the pace of quantitative tightening.
The Chancellor welcomed the MPC’s decision to scale back the speed at which it is reducing its balance sheet from a pace of £100bn a year to £72bn a year.
However, she raised concerns about the potential impact on the bond market in a letter to Governor Andrew Bailey.
She said: “It is important that the Bank continues to liaise closely with the Debt Management Office to ensure the Bank’s operations do not impact on the government’s wider gilt issuance strategy.”
UK bond yields have edged up today despite the promised slowdown in quantitative tightening – the Bank’s programme of reducing the £895bn UK debt pile it built up between 2009 and 2021 in the wake of the global financial crisis and the pandemic.
It has been accused of destabilising the bond market by actively selling too many gilts. It sold £13bn of gilts last year and plans to sell another £21bn over the next year.
Interest rates will continue to fall but the Bank of England is “in no rush” amid persistent inflation, according to a former policymaker.
Michael Saunders, a member of the Monetary Policy Committee from 2016 to 2022, said the “current elevated level of inflation expectations will keep pay growth relatively high”.
He warned: “Before cutting again, the MPC will need to see stronger evidence that pay growth is slowing to a target-consistent pace and that slower pay growth will feed through to lower services inflation.
“This points to early 2026 for the next rate cut, rather than before the end of this year.
“The decision to slow QT and scale back sales of long gilts is sensible and reduces risks that – in current stressed gilt market conditions – QT could have adverse side effects by adding significant upward pressure on yields.”
Michael Saunders said the next rate cut would likely come early next year – Heathcliff O’Malley
Wall Street’s main indexes jumped at the open a day after the Federal Reserve delivered a quarter-point interest rate cut.
Fed chairman Jerome Powell said that the softening jobs market was a priority for the central bank after it delivered the highly expected cut, indicating more reductions could follow at its October and December meetings.
Meanwhile Intel climbed after Nvidia decided to build a stake in the company.
The chipmaker jumped 26pc after Nvidia said it will invest $5bn (£3.7bn) in the company, throwing its heft behind the struggling US chip foundry. However, it stopped short of giving it a crucial manufacturing deal.
Nvidia was up 2.76pc, bouncing back from Wednesday’s declines when a report said Chinese tech firms might stop buying its chips.
At the start of trading, the S&P 500 rose 0.4pc to 6,627.16 and the tech-heavy Nasdaq Composite climbed 0.8pc to 22,445.49. The Dow Jones Industrial Average edged down 0.1pc to 45,974.08.
Andrew Bailey has done little to ease the monumental challenge facing Rachel Reeves in her Budget in November.
The Chancellor is expected to have to find anywhere between £20bn and £50bn of tax rises and spending cuts to get her financial plans back on track.
Lower borrowing costs and more support in the debt markets from the Bank of England could help the Chancellor, as it would reduce the strain of paying interest on the £2.9tn national debt.
Unfortunately for Reeves, the Governor and his eight colleagues on the Monetary Policy Committee (MPC) declined to provide much help in either department on Thursday.
Andrew Bailey has declined to provide help in lowering borrowing costs and providing more support in the debt markets for the Chancellor – Kirsty O’Connor/Treasury
The Bank of England faces a “tricky” decision on interest rates at its next meeting in November before Chancellor Rachel Reeves announces her fiscal plans in the Budget.
Anna Leach, chief economist at the Institute of Directors, said the decision to hold rates at 4pc today was “the right call” amid rising inflation.
She said: “November’s decision, however, will be a tricky one.
“Business confidence and hiring remain under pressure as we head towards a difficult Budget with a substantial fiscal hole to fill.
“At the same time, firms continue to face acute cost and pricing pressures following the rise in employment costs.
“Given the UK’s recent inflation history, the priority must remain to squeeze out any remaining price pressures.”
Rachel Reeves’s faces an “even greater burden” in trying to balance the public finances after the Bank of England announced its plans for reducing its portfolio of UK government bonds, according to a wealth manager.
Rathbones said the muted reaction of the pound and in bond markets suggested “some disappointment that the Bank did not go further” as it reduced its quantitative tightening programme from £100bn a year to £70bn.
Head of market analysis John Wyn-Evans said: “With accumulated debt at elevated levels and annual deficits not shrinking fast enough, the Government has to issue large amounts of gilts and Treasury bills every year to fund its spending as well as the interest payments on existing debt.
“Its task in this respect has been made tougher by having to compete with the Bank of England itself which has been reducing the amount of government debt built up on its own books (through past episodes of quantitative easing), not only by not replacing maturing gilts but also through active sales.
“Combined with global pressure on bonds, which has pushed yields on longer-dated issues up to levels not seen for several decades in the UK, the US and Japan, this places an even greater burden on the Chancellor.
“Today, again as investors had been led to believe, the Bank reduced its planned sales in the year ahead from £100bn to £70bn.
“This is certainly a positive development and relieves some of the supply pressure from the market. Further good news is that the Bank will focus on selling more bonds with shorter maturities and only 20pc of sales will be from longer-duration issues with maturities beyond 2055 (versus around a third previously).”
“Initial market reactions, with bond yields marginally higher and sterling a touch weaker, seem to suggest some disappointment that the Bank did not go further.”
The Bank of England has kept its options open about making another rate cut this year, according to Deutsche Bank, after policymakers kept their language around the path ahead unchanged.
Chief UK economist Sanjay Raja expects one more reduction in the Bank Rate this year, in December, and two more in 2026.
He said: “The MPC stuck to its long-held guidance that a ‘gradual and careful approach to the further withdrawal of monetary policy restraint remained appropriate’.
“The MPC also reiterated that monetary policy was not on a pre-set path – and the MPC ‘would remain responsive to the accumulation of evidence’.
“Put simply, a Q4-25 rate cut remains very much on the table with the MPC doing little to shift market expectations one way or another.”
Mathieu Savary, a strategist at BCA Research, said a weakening economy would eventually force policymakers to act.
He said: “The Bank of England continues the deal with a bifurcated picture. Inflation remains too elevated to cut interest rates quickly now, but the weak economy will eventually force its hand.
“Slowing the pace of QT only signals that easing will ultimately prevail.”
Higher prices in Britain and around the world for goods like beef, cocoa beans and coffee have helped drive up food and drink inflation, the Bank of England said.
“Labour costs and costs associated with new packaging regulation had also accounted for some of the increase in food prices,” the MPC wrote in the summary of its rate decision.
Several large retailers and industry groups have warned that rising business costs – namely National Insurance contributions, the minimum wage, and new packaging taxes – have put pressure on prices in shops.
The MPC said the outlook for global trade policy continued to be “highly uncertain” as a result of rising US tariffs.
While global growth has so far been steady, this might be partly to do with companies “front-loading” exports, new tariff rates being put on pause, and some goods exports being rerouted, according to the committee.
The impact of higher tariffs could therefore be “slower, although not necessarily smaller” than the Bank had previously assumed.
Money markets indicated there is a greater chance of the Bank of England cutting interest rates again this year following its decision to scale back the pace of quantitative tightening.
Traders are betting there is a 37pc probability of another reduction in borrowing costs before the end of the year, compared to less than 30pc before the latest announcement by the Monetary Policy Committee.
UK bonds were outperforming European peers, with the yield on 10-year UK gilts flat at 4.62pc, compared to rises of around one basis points in the likes of France and Germany.
Yields indicate the return the government must pay to buyers of its debt.
The FTSE 100 rose even as economists warned that inflation worries would prevent the Bank of England making more rate cuts this year.
The UK’s blue-chip index climbed 0.3pc after a brief drop in the run-up to the decision, while the mid-cap FTSE 250 gained 0.4pc.
Paul Dales of Capital Economics said: “The key point is that the Monetary Policy Committee’s worries that the recent rise in inflation could feed into wages and the price-setting process haven’t diminished.
“Some elements of the policy statement could be interpreted to suggest the MPC has become a little more concerned, but this change feels marginal.”
However, he added that he still thinks a bigger fall in inflation next year than most expect “will prompt the Bank to resume cutting interest rates in February and to reduce them to 3pc by the end of the year”.
Investors expect rates to fall to only 3.5pc.
It is “doubtful” that the Bank of England will resume interest rate cuts next year, a FTSE 100 asset manager has warned.
George Brown, senior economist at Schroders, said: “With inflation heading in the wrong direction, there was no question that the Bank would be on hold today. But while markets are betting on rate cuts resuming next year, we remain doubtful this will materialise.
“In our view, the balance of risks is drifting towards renewed tightening given persistent domestic inflationary pressures. We continue to expect rates to remain on hold this year and next, but we can’t rule out the possibility that the Bank’s next move will be up, rather than down.
“A slowdown in quantitative tightening from £100 billion was clearly flagged, the only question would be to what extent. The Bank’s announcement that it will allow £70 billion of gilts to roll off its balance sheet was broadly in line with our expectations, albeit meaning that active gilt sales will have to step up to £21bn.”
The value of the pound was little changed following the widely expected decision by the Bank of England to keep interest rates on hold.
Sterling was flat against the dollar at $1.363 and was down 0.1pc versus the euro at €1.152.
The Bank of England should have completely stopped actively selling gilts to ease pressure on government borrowing costs, a think tank has warned.
Carsten Jung, associate director for economic policy at IPPR and former Bank of England economist, said: “The Bank was right to slow the unwinding of its economic support programme – quantitative tightening.
“It has added unnecessary pressure on gilt yields at a time of global pressures. The Bank should have in fact gone further and fully stopped active gilt sales, as these are not needed for its monetary policy strategy.
“Meanwhile, the expected inflation bump over the summer is projected to ease and the Bank of England should more strongly signal how it intends to lower rates over the coming months, given a range of factors pointing to weaker demand.”
Businesses are already worried about the potential impact of further tax rises, according to a Bank of England survey.
Its latest poll described “consumer caution” as a “key theme”, with “some now worrying about potential impacts on confidence from the upcoming Autumn Budget”.
Bosses also warned that Rachel Reeves’s inheritance tax raid on farmers and entrepreneurs in the Budget last Autumn was having a chilling effect on the economy.
“Family and individually owned private businesses are concerned about changes in inheritance tax laws making them less willing to invest”.
Policymakers held rates steady as they remain “focused on squeezing out any existing or emerging persistent inflationary pressures”.
The MPC pointed to inflation hitting 3.8pc in August, which they expect to “increase slightly in September, before falling towards the 2pc target thereafter”.
The committee “remains alert to the risk that this temporary increase in inflation could put additional upward pressure on the wage and price-setting process”.
In their latest report, rate setters said: “There has 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 has allowed for reductions in Bank Rate over the past year. The Committee remains focused on squeezing out any existing or emerging persistent inflationary pressures, to return inflation sustainably to its 2pc target in the medium term.
“Underlying disinflation has generally continued, although with greater progress in easing wage pressures than prices.”
The Bank of England said it would slow down the reduction of its UK government bond portfolio in a potential boost for the Chancellor.
The Bank said it would lower its stock of UK government bond purchases by £70bn over the next year, taking its total to £488bn.
This represents a slowdown from its previous pace of £100bn a year. The reduction follows concerns that the Bank was pushing up borrowing costs by smothering the bond market with UK debt.
Governor Andrew Bailey said: “Today we reduced the size of our annual QT target from £100bn to £70bn.
“The new target means the MPC can continue to reduce the size of the Bank’s balance sheet in line with its monetary policy objectives while continuing to minimise the impact on gilt market conditions.”
The Governor of the Bank of England has said interest rates must be cut “gradually and carefully” after voting to hold borrowing costs at 4pc.
Members of the Monetary Policy Committee were split 7-2 on the decision, with Swati Dhingra and Alan Taylor backing a quarter of a percentage point reduction.
Andrew Bailey said: “We held interest rates at 4pc today. Although we expect inflation to return to our 2pc target, we’re not out of the woods yet so any future cuts will need to be made gradually and carefully.”
Interest rates have been left unchanged by the Bank of England at 4pc amid persistent inflation and wage rises.
Traders are officially pricing in a zero per cent chance that the Bank of England will cut interest rates at noon.
There is a 29pc chance of there being one more cut over the remaining two meetings this year.
The pace of the Bank of England’s quantitative tightening programme matters because it influences how much money Chancellor Rachel Reeves will have to keep the public finances in balance.
A slowdown in how fast the Bank reduces its balance sheet could help lower yields on bond markets – the return that issuers of debt, like the Treasury, must pay to buyers.
However, it could also increase the costs faced by the Chancellor in terms of the coupon payments the British taxpayer must pay to the Bank of England for holding Treasury debt. It is all a balancing act.
Ultimately, Ms Reeves wants to address the deficit, as bringing it down will lower the amount the government borrows, and thus the amount it spends on servicing the national debt.
This has significant implications for Britain’s economic growth.
Joachim Klement, an analyst at Panmure Gordon, said: “It remains a well-established fact that countries with higher debt loads see a decline in GDP growth.
“One driver of this slowdown is that debt costs rise, and governments must spend more on debt servicing while reducing spending on other areas that could boost growth.
“Another is that the increasing long-term government bond yields also increase the cost of debt for businesses.”
Government borrowing costs have edged lower ahead of an announcement by the Bank of England on the pace of its quantitative tightening programme.
The yield on two-year, 10-year and 30-year gilts nudged downwards in morning trading despite rises across other European markets.
Yields – the returns the government promises to buyers of its debt – slipped ahead of an expected reduction in the speed at which the Bank of England will sell off its holdings of UK debt.
The Bank carried out an £895bn bond-buying campaign between 2009 and 2021 to prop up the British economy in the wake of the global financial crisis and the pandemic.
It has since begun reducing its balance sheet by either selling those bonds at a loss or allowing them to mature, at a rate of £100bn a year.
However, many analysts expect the Bank to slow down this pace amid concerns it is causing volatility in bond markets, which in turn pushes up the cost of government borrowing.
In a big week for central bank rate decisions, Taiwan’s CBC left its borrowing costs unchanged amid “rapid economic growth and low inflation”.
Taiwan’s central bank kept interest rates at 2pc after its economy expanded by 3.1pc in the second quarter amid booming exports related to demand surrounding AI.
Jason Tuvey of Capital Economics said: “ Growth is likely to remain solid over the next few quarters.
“Even if export growth slows from its current rapid rates, domestic demand is likely to pick up, supported by accelerating real wage growth and buoyant investment.”
He added: “All told, we expect the CBC to leave interest rates on hold at 2pc for the foreseeable future whereas the consensus is for some modest monetary easing over the next couple of years.”
Labour’s policies are strangling the UK economy and risk fuelling years of “anaemic growth”, the boss of high street giant Next has warned.
Lord Wolfson, the retailer’s chief executive, warned that the future of the UK economy “does not look favourable” because of new red tape and unsustainable government spending.
He said: “At best we expect anaemic growth, with progress constrained by four factors – declining job opportunities, new regulation that erodes competitiveness, government spending commitments that are beyond its means, and a rising tax burden that undermines national productivity.”
Lord Wolfson, Next’s chief executive, has issued a warning over the future of the UK economy – Chris Ratcliffe/Bloomberg
The value of the pound has edged higher amid expectations from traders that interest rates will be kept on hold.
Sterling was up 0.1pc versus the dollar to $1.364 as money markets suggested a near zero chance of a reduction in UK borrowing costs later.
It comes a day after the US Federal Reserve announced its first interest rate cut of the year.
The pound was down 0.1pc versus the euro at €1.153.
Norway’s central bank has announced that it has cut interest rates today but policymakers warned of the threat of higher inflation.
Norges Bank reduced borrowing costs by a quarter of a percentage point to 4pc despite warning that economic growth has been stronger than anticipated while inflation is likely to be higher than previously expected.
Jack Allen-Reynolds of Capital Economics said: “With the economy growing at a decent pace and underlying price pressures stubbornly high, the case for additional interest rate cuts does not look particularly strong.”
Money markets indicate the next interest rate cut from the Bank of England could come as late as April next year.
Interest rates were cut from 4.25pc to 4pc in August, releasing some pressure for borrowers and mortgage holders.
But economists believe the MPC may avoid cutting rates at meetings in November and December. Traders are betting there is more than 70pc chance that rates will be left unchanged.
Sandra Horsfield, an economist for Investec, said August’s inflation data “revealed price rises being stuck at uncomfortably high rates” with the overall consumer prices index rate “considerably above” the Bank’s 2pc target level.
“The likelihood of a rate cut this week seemed in any case remote; but beyond that too, we judge that it will take evidence of falling inflation to persuade a majority on the MPC that further rate cuts are appropriate,” she said.
“Therefore, we expect the MPC to sit out the November and December meetings too and only resume rate cuts early next year.”
The Bank of England will be “cautious” about interest rate cuts after inflation climbed to 3.8pc in August, economists have said.
Monica George Michail, associate economist for the National Institute of Economic and Social Research (Niesr), said: “Given price pressures from higher labour costs, elevated inflation expectations, and upside risks from food prices, we think the MPC will keep interest rates on hold this Thursday.
“While a faster pace of rate cuts would support economic growth and lower the Government’s borrowing costs, the Bank will likely remain cautious in the next few months as it focuses on keeping inflation under control.”
Thanks for joining me with our coverage of the Bank of England’s next interest rate decision.
Policymakers are expected to keep rates on hold but Chancellor Rachel Reees will also be closing watching their plans for quantitative tightening, which could impact the cost of government borrowing.
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UK stocks were mixed at the start of trading ahead of the Bank of England’s interest rate decision.
The benchmark FTSE 100 was up 0.2pc to 9,222.95 in early trading after the US Federal Reserve cut interest rates for the first time this year on Wednesday.
However, the domestically-focused FTSE 250 slipped 0.1pc to 21,605.99 as markets pinned little hope on a boost from thee Bank of England.
European shares jumped higher in the wake of the Fed decision, with the Cac 40 in Paris up 0.7pc and the Dax in Frankfurt climbing 1.2pc. Asian shares were mixed.
Stocks in the US closed near their record highs after the Federal Reserve cut interest rates by 25 basis points to 4.25pc, in a move that was no surprise to Wall Street.
However, Fed officials indicated they expect to make two further cuts by the end of the year and one cut in 2026. It marks a change from market forecasts which had anticipated that the Fed would be making the first of five cuts.
The major indices on Wall Street flowed between gains and losses. The S&P 500 slipped 0.1pc to 6,600.35. The Dow Jones Industrial Average rose 260 points, or 0.6pc to 46,018.32, while the Nasdaq composite fell 0.3pc to 22,261.33.
The US dollar index, which measures the greenback against a basket of currencies, rose 0.4pc. US 10-year government borrowing costs rose six basis points during the day to 4.08pc.
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