Bank of England Holds at 3.75% as Consumer Confidence Dynamics Affect Spending Outlook

The Bank of England has maintained interest rates at 3.75%, with consumer confidence playing a crucial role in determining how economic conditions translate into spending behavior. Confidence affects the transmission of monetary policy.
The monetary policy committee’s 5-4 vote occurs in a context where consumer confidence has been battered by years of inflation and economic uncertainty. Even as inflation falls and real incomes begin recovering, cautious consumers might save rather than spend, limiting the boost from rate cuts.
Interest rate reductions aim to stimulate spending partly by lowering savings returns and reducing debt costs. However, if consumers remain pessimistic about future prospects, they might maintain high savings rates despite lower returns. This would reduce the effectiveness of monetary easing.
Confidence dynamics create asymmetry in policy effects. Raising rates reliably discourages spending through higher borrowing costs, but cutting rates may not reliably encourage spending if confidence remains low. This complicates the six rate cuts since mid-2024—they may not stimulate growth as much as historical relationships suggest.
Governor Bailey’s projection that inflation will fall to around 2% by spring should boost confidence by providing price stability reassurance. However, the GDP forecast of only 0.9% growth and unemployment rising to 5.3% might undermine confidence, creating a challenging dynamic. Chancellor Reeves’s budget measures, including utility bill cuts and rail fare freezes from April, directly boost purchasing power and might improve confidence more reliably than monetary policy. The inflation forecast of 2.1% by mid-2026 assumes confidence recovers gradually, but if pessimism persists, spending might disappoint, keeping inflation even lower and growth weaker than forecast.