The Bank of England has kept its key interest rate unchanged at 3.75%, while signalling that easing inflation could open the door to rate cuts in the coming months. Policymakers cited improving inflation prospects, partly driven by recent government cost-of-living measures, but stressed the need to ensure price pressures remain under control.
The Monetary Policy Committee (MPC) voted narrowly to hold rates, reflecting growing divisions over the timing of future cuts. While economic growth is expected to be weaker than previously forecast, inflation is now projected to fall close to the Bank’s 2% target by spring and remain subdued into 2026.
Government measures announced in the late-2025 budget, including reductions in household energy costs and a rail fare freeze, are expected to contribute to a sharper-than-expected fall in inflation. As a result, inflation is forecast to drop to just above the 2% target by mid-2026, down significantly from late-2025 levels.
Despite the more favourable inflation outlook, the Bank warned of a softening labour market, with unemployment expected to rise this year. Policymakers also noted that higher employer costs and wage pressures have weighed on employment growth, which could help cool wage-driven inflation.
Financial markets are now pricing in a roughly even chance of a rate cut at the Bank’s next policy meeting. While some policymakers favour further reductions to support the slowing economy, others remain cautious, citing risks from persistent wage growth and inflation expectations.
