The Fiscal Friction Facing Andrew Bailey
Numbers do not lie. As of November 05, 2025, the Bank of England (BoE) faces a mathematical trap. The yield on the benchmark 10-year Gilt has surged to 4.51 percent, a level not seen since the height of the 2022 liability-driven investment crisis. This spike follows the October budget announcement from Chancellor Rachel Reeves, which detailed an additional 28 billion GBP in annual borrowing. The Monetary Policy Committee (MPC) meets tomorrow, November 06, 2025, to decide if a 25-basis-point cut to the current 5.00 percent Bank Rate is sustainable or a systemic risk. According to real-time yield data, the market is no longer pricing in a smooth easing cycle. Instead, investors are demanding a higher term premium to compensate for fiscal expansion.
Inflation Remains Sticky in the Services Sector
The headline Consumer Price Index (CPI) sits at 2.3 percent, slightly above the 2.0 percent target. However, the MPC focuses on the core components. Services inflation is the primary culprit, currently locked at 4.8 percent. This figure remains far too high for a central bank attempting to normalize rates. Per the latest ONS inflation report, wage growth in the private sector is moderating to 3.9 percent, but it is not falling fast enough to offset the price pressures in the hospitality and professional services sectors. Huw Pill, the BoE Chief Economist, has repeatedly warned that the last mile of inflation control is the most difficult. The data suggests he is correct. The MPC cannot afford a dovish mistake while the Treasury is simultaneously injecting liquidity into the economy through infrastructure spending.
The Great Divide Between Mann and Dhingra
The 9-member committee is fractured. Catherine Mann, the most prominent hawk on the panel, has consistently voted for higher rates, citing the risk of embedded inflation expectations. On the opposite end, Swati Dhingra argues that the lag in monetary policy transmission is already choking the manufacturing sector. Dhingra points to the 0.1 percent GDP growth in the third quarter of 2025 as evidence that the economy is stalling. The upcoming vote is expected to be a 7-2 split in favor of a 25-basis-point cut, but the language in the meeting minutes will be the true market mover. If the committee signals that this is a one-and-done cut before a long pause, the GBP could see a relief rally. If they signal a series of rapid cuts, the Gilt sell-off will likely accelerate.
| Metric | Current Value (Nov 2025) | Year-on-Year Change |
|---|---|---|
| Bank Rate | 5.00% | -25 bps |
| 10-Year Gilt Yield | 4.51% | +62 bps |
| GBP/USD Exchange Rate | 1.2840 | -1.2% |
| Core CPI | 3.2% | +0.1% |
Overnight Index Swaps and Market Probabilities
As of this morning, Overnight Index Swaps (OIS) are pricing in an 82 percent probability of a rate cut tomorrow. This is down from 94 percent just two weeks ago. The shift in sentiment is directly tied to the volatility in the bond market. When Gilt yields rise, they effectively do the BoE work for them by tightening financial conditions. If the market continues to drive yields higher, Andrew Bailey may find that further official rate cuts are counterproductive, as mortgage lenders are already raising fixed rates in response to the swap market. This phenomenon, known as the “de-coupling” of the Bank Rate and market rates, is a nightmare scenario for the BoE. It suggests that the central bank is losing control of the yield curve.
The Path to the February 2026 Monetary Policy Report
The focus now shifts from the immediate decision to the terminal rate. Where does the easing cycle end? Current market pricing suggests a terminal rate of 3.75 percent by late 2026, but this assumes no further inflationary shocks. The elephant in the room is the global trade environment. With tariffs becoming a central theme in international politics, the cost of imported goods could rise sharply in the coming months. The MPC will be forced to weigh these external supply shocks against the domestic fiscal expansion. The next major data point to watch is the February 2026 Monetary Policy Report, which will provide the first full assessment of the Budget’s impact on long-term inflation forecasts. Until then, expect the 4.50 percent level on the 10-year Gilt to act as a pivot point for all UK risk assets.
