Key Takeaways
- First monetary policy meeting of the year sees interest rates held, following a cut in December 2025.
- The Bank of England is expecting inflation to fall back to the 2% target in April 2026.
- The Monetary Policy Committee voted five to four to keep rates unchanged.
The Bank of England held interest rates at 3.75% following an unexpected increase to inflation in December and more positive economic indicators in January. The decision was anticipated well in advance by futures markets, which still expect the only rate cut of the year to occur in April.
The BoE’s Monetary Policy Committee voted by a majority of five votes to four in favor of the rate hold. The four members who voted to cut preferred to lower rates by 25 basis points to 3.5%.
The BoE still expects UK inflation to fall back to its 2% target in 2026 and named April as the most likely month because of falling energy prices and the impact of the tax-raising Autumn Budget 2025. The Bank’s governor, Andrew Bailey, predicts “quite a sharp drop in inflation over coming months.”
The rate hold follows a rise in inflation to 3.4% December 2025 and further signs of a weakening UK jobs market ahead of the official GDP data for December on Feb. 12.
What Did the BoE Say About Inflation?
The Bank of England cut rates four times in 2025, which took the base rate from 4.75% to 3.75%. Economists still forecast further rate cuts in 2026 as inflation falls, but Governor Andrew Bailey says that further interest rate cuts “will become a closer call” as the data evolves and the terminal or neutral interest rate approaches.
The BoE’s MPC says that UK inflation will continue to fall, but says there is a division on the committee over how labor market and wage data is interpreted. Services inflation and wage inflation remain concerns of the Bank and a reason it has cited in hold off cutting rates in 2026.
The Bank of England is Divided and Cautious on Interest Rates
Fund managers say there are further signs of caution in the latest messaging from the Bank of England.
“Despite clearer signs of cooling in hiring and pay, today’s communication suggests that the bar for easing remains higher than the data alone might imply,” says Todd Cutting, head of enhanced liquidity and senior portfolio manager at Aviva Investors.
“The message is one of cautious discipline: Acknowledging softness, but signaling that it is not yet soft enough to shift the policy stance.”
Joaquin Thul, economist at EFG Asset Management, says “the tight split among MPC members shows the divergence on their assessment on how much progress has been achieved already to bring inflation down.”
Still, he expects two interest rate cuts in the upcoming meetings.
“However, as inflation recedes gradually, these will continue to be a close call given the underlying discussions among MPC members.”
Will UK Interest Rates Fall Further?
Matthew Ryan, head of market strategy at Ebury, says the case for rate cuts is clear.
“The main takeaway is that the MPC appears increasingly more confident in achieving its inflation goal than at the time of its previous meeting, which could pave the way for sooner and more aggressive cuts to the base rate this year.”
James Smith, developed markets economist at ING, flags the next meeting as key, with the governor as the swing voter.
“Today’s decision unquestionably boosts the chance of a March rate cut,” he says.
“Our sense is that if the data follows recent trends—higher unemployment/falling payrolls, slower wage growth—then he will swing behind a cut next month,” he adds.
What’s Happening With the UK Economy?
While the UK central bank has an inflation-targeting mandate, it is mindful of the conditions in the real economy, which its agents describe as “lackluster.”
The UK economy is still weak, with rising unemployment making the headlines and a fresh set of tax changes due to hit businesses, savers, and homeowners in April. GDP growth is expected to slow from around 1.5% in 2025 to 1.1% in 2026, according to official forecasts.
Neil Birrell, chief investment officer at Premier Miton Investors says that “the economy could do with some stimulus from the BoE.”
UK Political Risk Returns
Another factor that has surfaced since the last MPC meeting is political risk, which has pushed up gilt yields and piled pressure on the pound. A crisis currently engulfing UK Prime Minister Keir Starmer could ultimately result in a change of Labour Party leader in 2026, which could itself cause major fiscal policy changes in Whitehall. As well as several other geopolitical factors, the Bank is likely to approach such upheaval with a further degree of caution.
“This could shift the UK’s economic policies even further to the left, with more tax and spend policies, which would require monetary policy staying tighter for longer,” says Kathleen Brooks, research director at trading platform XTB.
When Are the Bank of England’s Next Interest Rate Decisions?
- March 19, 2026.
- April 30, 2026.
- June 18, 2026.
- July 30, 2026.
- Sep. 17, 2026
- Nov. 5, 2026.
- Dec. 17, 2026.
