The Bank of England has decided to keep its key interest rate at 3.75%, but Governor Andrew Bailey has confirmed that markets are right to see even odds for a cut at the next meeting in March. This signals that while policymakers chose to pause this time, they remain on an easing path.
The monetary policy committee’s 5-4 vote to hold rates steady was closer than many analysts expected, with four members supporting an immediate quarter-point reduction. This split decision follows six previous rate cuts since mid-2024 and suggests that the committee is increasingly aligned on the need for further easing. The division highlights the complex trade-offs policymakers face between supporting growth and controlling inflation.
Bailey’s comments following the decision emphasized the positive inflation developments that are making further rate cuts possible. He noted that inflation is projected to return to approximately 2% by spring, which he described as good news for the economy. When asked about the probability of a March rate cut, Bailey endorsed the market’s 50-50 assessment, calling it “not a bad place to be.”
Economic forecasts have been revised to show weaker growth, with GDP now expected to rise by just 0.9% this year, down from 1.2% previously. The Bank attributes some of this weakness to higher employer costs stemming from increased national insurance contributions and the rising minimum wage. These factors have contributed to stagnant employment over the past year and are expected to moderate wage growth, which should help prevent inflation from becoming entrenched.
The chancellor’s budget measures are proving effective in reducing inflationary pressures. Utility bill cuts and rail fare freezes coming into effect in April are expected to drive inflation down significantly, with the Bank now forecasting it will fall to 2.1% by the second quarter of 2026. This is substantially lower than December’s 3.4% reading and represents a return to near-target levels after the painful surge in prices that followed pandemic-related disruptions and the Ukraine conflict.