The Bank of England has opted to maintain interest rates at 3.75 percent following a highly competitive vote, while simultaneously signaling the possibility of rate reductions later this year. This decision follows a period where borrowing costs were widely expected to remain steady, especially after the Bank lowered them from 4 percent in December. Governor Andrew Bailey shared an optimistic update regarding inflation—the metric tracking price growth—projecting it will drop near the Bank’s 2 percent target starting in April. This is a significant acceleration from previous estimates that did not see inflation hitting that target until 2027.
According to the Bank, recent fiscal policies, including reductions in household energy bills and lower wholesale gas prices, are expected to provide much-needed relief to inflationary pressures. However, while the inflation outlook has improved, the forecast for the U.K.’s economic health has been revised downward. The Bank reduced its 2026 growth projection from 1.2 percent to 0.9 percent. Additionally, the labor market is showing signs of cooling, with the unemployment rate now expected to rise to 5.3 percent this year, up from the earlier forecast of 5 percent.
A divided committee
The choice to hold rates this month was exceptionally close, decided by a narrow 5-4 margin among the nine members of the Monetary Policy Committee (MPC). Four members advocated for an immediate quarter-point cut to 3.5 percent, reflecting a strong internal push for further easing. Governor Andrew Bailey was the only member to shift his stance since the December meeting; while he voted to maintain the current rate, he acknowledged that he could “see scope for some further easing of policy” provided the economic data remains favorable.
U.K. monetary policy and the 2026 spring pivot
In its official summary, the MPC noted that “on the basis of the current evidence, the bank rate is likely to be reduced further.” The committee emphasized that upcoming decisions will be increasingly difficult and will hinge entirely on how the inflation outlook evolves. Financial analysts have interpreted these signals as a hint that the next rate cut could arrive sooner than originally anticipated, with many eyeing the Bank’s upcoming meetings in March or April for a potential move.
The February 5, 2026, decision has solidified market expectations for a spring pivot, with the next interest rate review scheduled for March 19, 2026. While the U.K. ended 2025 with the highest inflation in the G7 at 3.4 percent, the Bank’s new projections suggest that the disinflationary process is accelerating, with CPI inflation now expected to hit 2.1 percent as early as Q2 2026—a full 0.7 percentage points lower than the November forecast. This rapid descent is being driven by base effects from energy and food, alongside a softening labor market that has seen private sector pay growth cool to 3.8 percent.
