Bank of England set to pause rates
UK inflation remained at 3.8% in August, according to the Office for National Statistics, reinforcing expectations that the Bank of England will hold interest rates at 4% when its Monetary Policy Committee meets on Thursday.
The figure matched analysts’ forecasts and reflected persistent price pressures across food, restaurants and hotels.
Food and drink costs rose at an annual rate of 5.1%, up from 4.9% in July, while petrol and hospitality prices also increased. A sharp fall in airfares offset those rises, preventing the headline rate from climbing further.
Slowdown in rate cuts
The BoE has reduced borrowing costs five times since last summer, but economists now expect a slower pace of easing.
With inflation still nearly double the 2% target, traders have scaled back bets on further cuts. Market pricing suggests only one or two small reductions are likely before the end of 2026.
Economic and political pressures
The latest data highlight the challenge facing chancellor Rachel Reeves ahead of her November Budget. UK growth slowed to 0.2% in the three months to July, down sharply from 0.7% in the first quarter, as higher taxes and the drag from the US trade war weighed on businesses.
Responding to the inflation figures, Reeves acknowledged the strain on households. “I know families are finding it tough and that for many the economy feels stuck,” she said.
“That’s why I’m determined to bring costs down and support people who are facing higher bills.”
European comparisons
Britain’s inflation rate remains well above its continental peers. August data showed price growth at 2.1% in Germany and just 0.8% in France, leaving eurozone inflation overall at 2.1%.
The Bank of England expects UK inflation to peak at 4% in September, largely due to rising food prices. Services inflation, a key measure of domestic cost pressures watched closely by policymakers, edged down from 5% to 4.7% last month.
With stubborn inflation, slowing growth and a widening fiscal gap, the government faces tough decisions in the months ahead, balancing economic stability with political promises to ease the cost of living.
