The Bank of England has decided to maintain its benchmark interest rate at 3.75%, while forecasting a dramatic decline in inflation from the current 3.4% to just 2.1% by the second quarter of 2026. This substantial improvement is expected to enable further rate cuts in the months ahead.
The committee’s voting pattern showed a surprisingly narrow 5-4 split, with four members supporting an immediate quarter-point reduction. This division is significant because it demonstrates growing momentum toward lower rates within the committee. Since mid-2024, policymakers have already cut rates six times, and the latest vote suggests this easing cycle will continue.
Governor Andrew Bailey emphasized the positive inflation developments while explaining why rates were held this time. He stated that inflation is projected to return to approximately 2% by spring, which represents good news for the economy. However, he stressed that ensuring inflation remains at this level requires maintaining current policy settings for now, though he indicated further cuts should be possible later in the year.
Economic forecasts have been revised to show weaker growth, with GDP now expected to rise by just 0.9% this year compared to the 1.2% anticipated in November. This downgrade reflects concerns about the impact of higher employer costs, particularly from increased national insurance contributions and the rising minimum wage. The labor market is also expected to soften, with unemployment projected to reach 5.3%.
The dramatic improvement in the inflation forecast is largely attributable to government policy measures. Chancellor Rachel Reeves’s budget package includes utility bill cuts and rail fare freezes, both taking effect in April, which are expected to significantly reduce consumer price pressures. The projected decline from 3.4% in December to 2.1% by mid-2026 would bring inflation to just a whisker above the government’s 2% target, offering substantial relief to households after years of elevated living costs.