Key Takeaways
- Financial markets now expect an interest rate cut in March, rather than April.
- The BoE governor refused to commit to the path of interest rates, but appeared to rule out imminent rate rises.
- The first Bank of England meeting of the year was overshadowed by asset price volatility and political scandal in the UK.
For a Bank of England meeting that saw no change to interest rates, the Feb. 6 decision contained a number of dynamic shifts that will be of interest to bond investors, homeowners and savers: crucially, a changed trajectory of expected interest rate cuts.
Futures markets now assign a 65% chance of a rate cut on March 19, whereas before the meeting, April was the most likely month. After that, the odds are highest for the June meeting to see another cut.
Amid heightened asset market volatility and UK political drama, Bank Governor Andrew Bailey said in the press conference accompanying the Feb. 7 meeting that there was “good news” in the form of falling inflation.
In November, the Bank had pinned Q2 as the period when inflation, currently at 3.4%, would hit the 2% target. Now April is pencilled in as the most likely month, at the beginning of the second quarter.
While the timing of rate cuts has changed as a result, swaps markets still predict just one interest rate cut in 2026, bringing the bank rate down to 3.5%. This might give a symbolic boost to the housing market as it shifts gears in spring, but monetary policy changes tend to take six months to feed through to the real economy.
At the press conference, the governor predicted “quite a sharp drop in inflation over coming months” and said this will be visible in the next data release for January CPI, which is due on Feb. 18.
Where Will UK Interest Rates End Up This Year?
The monetary policy meeting brought into focus the terminal rate of interest, which would mark the end of a cutting cycle that started in August 2024 and has seen the bank rate fall from 5.25% to 3.75%. 2025 saw four interest rate cuts, but futures markets started 2026 assuming no change to monetary policy this year.
The neutral rate is “the interest rate that neither stimulates nor depresses inflation”, according to Bank of England MPC member Dr. Catherine L. Mann, in a speech in 2025.
While the terms “neutral” and “terminal” rates are often used interchangeably, those taking out mortgages or using credit will care more about the terminal rate. This is because it helps answer the question whether rates will go any lower and at what point does a central bank starts considering raising rates. It matters to those thinking about taking out fixed-rate mortgages in particular.
Pressed on terminal rates, the governor said there remained uncertainty about the level but pointed to the data: That swaps markets imply interest rates will be 50 basis points lower by the end of 2026.
But the governor said he wouldn’t “endorse 3.25%” as the terminal rate. On the other hand, he ruled out imminent interest rate rises, an idea that has entered the conversation in the eurozone after a drop in the key policy rate from 4% to 2%.
The Bank of England Isn’t Worried About Market Volatility
As well as setting monetary policy, one of the Bank of England’s remits is financial stability, a role that was enhanced after the financial crisis. The central bank monitors asset prices, which have been volatile in early February: Bitcoin has crashed, precious metals have nosedived along with the stocks of software companies on AI threats. UK bond yields have risen again as a political crisis puts the Prime Minister Keir Starmer’s political future in question.
“All market conditions are orderly,” Bailey said, adding that the Bank doesn’t comment on politics.
Economist and investment bank reaction to February’s meeting was mixed. Some commentators focused on the ongoing cautious tone from the Bank and split among voters, while others sensed a shift of emphasis in the messaging.
Bank of America analysts highlighted March as the likely month for the next cut, followed by June. “We now feel more confident about our call that the BoE is likely to cut twice this year, vs. the upside risks we were highlighting before,” they said.
“Given the lag in disinflation and easing cycle in the UK, we think the bar for BoE to hike in 2027 is still very high,” the analysts added.
Joaquin Thul, economist at EFG Asset Management, notes the division within the nine-strong Monetary Policy Committee, which voted five-to-four to hold rates at this meeting.
“The tight split among MPC members shows the divergence on their assessment on how much progress has been achieved already to bring inflation down.”
