This week’s briefing takes a closer look at the data. Central banks on either side of the Atlantic are working toward the same goal of balancing growth and inflation, but they are moving at slightly different speeds. At home, the UK economy is sending mixed signals across GDP, inflation, and employment, reinforcing the need for clear and decisive measures in the upcoming Autumn Budget.
Read on for the full breakdown.
The Bank of England (BoE) left interest rates unchanged at 4% this week, in a widely expected move that reflects its concern over stubborn inflation. At the same time, it slowed the pace of its balance sheet reduction, cutting the target for gilt sales from £100bn to £70bn over the next year. Governor Andrew Bailey emphasised that inflationary pressures have not subsided - as we will discuss later.
The decision was not without political undertones. Bailey, in a letter to Chancellor Rachel Reeves, argued that Labour’s recent rise in payroll taxes and the national minimum wage had contributed to wage-driven inflation. Reeves, however, welcomed the Bank’s more measured approach to quantitative tightening, highlighting the need to coordinate carefully with the Debt Management Office to avoid disruption in the gilt market.
Markets saw little surprise in the announcement, with 30-year gilt yields barely moving before edging higher to 5.5%. The BoE has been under pressure from investors to slow sales, fearing they are exacerbating this year’s global bond market sell-off. Active gilt sales are set at £21bn in the coming year, compared with £13bn in the previous twelve months, a rise caused by fewer natural maturities rolling off the balance sheet.
The MPC vote reflected differing views. Chief economist Huw Pill argued for keeping the pace of reduction at £100bn, while external member Catherine Mann preferred slowing it further to £62bn. The compromise of £70bn will leave gilt holdings at £488bn by September 2026, down from a peak of £875bn in 2022. This balancing act demonstrates the BoE’s attempt to show independence from fiscal policy while still being sensitive to market fragility.
Bailey struck a cautious note: “We are not out of the woods yet. Any future cuts will need to be made gradually and carefully.”
The Federal Reserve has gone in another direction, lowering its key interest rate by 0.25 percentage points to a range of 4%–4.25% - its first cut since December. Chair Jerome Powell explained the move as a response to weakening labour market data, which showed meagre job gains in July and August and an outright decline in June, the first since 2020. With unemployment at 4.3% and signs of cooling demand, the Fed has judged that risks to growth now outweigh risks from inflation.
Inflation in the US remains above target at 2.9% but has eased sharply from the highs that prompted aggressive rate hikes in 2022. Powell emphasised that the Fed wants to avoid pressing down on the brakes just as the jobs market is losing speed. Internal divisions remain, however: one member pushed for a 0.5% cut, while seven others see no further reductions this year.
The Fed’s independence has been tested by President Trump, who has attacked Powell publicly, installed allies on the board, and demanded deeper cuts. Yet most analysts believe the central bank would have cut regardless of political pressure, citing both slowing growth and a less threatening inflation outlook. As Wells Fargo economist Sarah House put it: “The Fed knows that when the labour market turns, it turns very quickly, so they're wanting to make sure they're not stepping on the brakes of the economy at the same time the labour market has already slowed.”
ONS data showed the number of payrolled employees falling for a seventh consecutive month, down 8,000 in August. Wage growth has also edged down, with private sector pay rising 4.7%, compared with 4.8% previously. While still above the level consistent with the BoE’s inflation target, this marks a small but notable cooling.
Uncertainty over November’s Budget appears to be weighing heavily on employers. Reeves’s £25bn rise in employer national insurance contributions has already slowed recruitment, and businesses remain cautious about further tax changes, with many holding back on hiring until they have more clarity.
There are, however, hints of resilience. Job vacancies rose to 728,000 in the three months to August, the first increase in over two years. Economists suggest that while staffing cuts may have run their course, pay settlements are likely to drift lower in the months ahead. As Deutsche Bank’s Sanjay Raja noted, “This should give some comfort that the path ahead may be less bumpy than perhaps some of the survey data suggests.”
Real gross domestic product grew by 0.2% in the three months to July 2025 compared with the three months to April 2025, down from three-month-on-three-month growths of 0.3% in June 2025 and 0.6% in May 2025.
This comes at a politically sensitive time for Reeves as she prepares her autumn Budget. Business groups argue her tax rises are weighing on investment and hiring, and have urged her to avoid further increases. The British Chambers of Commerce warned: “The government has acknowledged it has asked a lot of business in the past year. Our message is now clear – there must be no more taxes on business in the autumn budget.”
Trade data added to the gloom, showing the goods deficit widening by £3bn in the three months to July. Exports to the US rose by £800m, but remain below pre-tariff levels. Combined with inflation holding at 3.8%, speculation about tax rises and weak growth is expected to weigh on confidence in the months ahead.
Economist Fergus Jimenez-England summed up the challenge: “Economic activity in the third quarter will be constrained by fiscal uncertainty weighing on household and business sentiments. Growth at this pace will do little to ease the fiscal challenges confronting the chancellor this autumn.”
The latest inflation figures provided no relief for households. CPI held at 3.8% in August, unchanged from July and almost double the Bank’s 2% target. Falling airfares and hotel costs helped offset higher petrol and diesel prices, but food inflation continued to climb, rising from 4.9% to 5.1%. Prices for staples such as beef, butter, and coffee all increased, while chocolate rose by an extraordinary 15.4%.
Although core inflation eased to 3.6% and services inflation slipped to 4.7%, the persistence of food-driven price rises complicates the BoE’s job. It explains why the MPC, as discussed earlier, has resisted calls for rate cuts. Inflation remains the highest in the G7, outpacing both the US at 2.9% and the eurozone at 2.1%.
Households continue to feel squeezed by April’s rises in taxes and regulated energy and water bills. Economists warn that global factors, including more extreme weather, are likely to keep food prices high.
Paul Nowak of the Trades Union Congress gave the opinion that, “keeping interest rates high will not bring down these prices – but instead, rates are adding to the pain for families and businesses.”
With this week’s briefing focusing on the data, some clear themes emerge. The Bank of England is holding rates while easing gilt sales, striking a balance between market stability and inflation control, while the Fed has already shifted to cuts in response to softer labour data and the push for growth.
At home, the jobs market is cooling but not collapsing, GDP shows an economy treading water rather than shrinking, and inflation—though sticky—is easing beneath the surface. A big risk still lies in public finances, where large debt and interest repayments are squeezing fiscal space. Much now rests on the autumn Budget to show that growth and stability can be returned across the board.