The Bank of England is widely expected to keep interest rates unchanged at 3.75% when it delivers its latest policy decision on Thursday. However, economists believe the central bank will also signal that reductions in borrowing costs are likely later in the year as officials continue to assess mixed economic data from across the UK.
Members of the Monetary Policy Committee (MPC) are predicted to vote in favour of maintaining the base rate at its current level, which already stands at a three-year low. This cautious stance follows an increase in inflation in December, the first rise seen in five months, with the annual rate climbing to 3.4%. The return of rising inflation has complicated the Bank’s efforts to justify further immediate cuts.
Financial markets suggest there is little expectation of a rate reduction at this week’s meeting. Current pricing indicates only a small chance of a cut in February, while the probability rises modestly for March. Most investors now anticipate that April will be the earliest opportunity for the next decrease, and potentially the only one this year.
After delivering four rate cuts during 2025, policymakers are now weighing the risk that inflation could become more persistent, particularly if wage growth remains elevated. While some committee members would prefer to stimulate the economy through cheaper borrowing, others remain focused on ensuring inflation returns sustainably to the Bank’s 2% target.
Tom Stevenson, investment director at Fidelity International, said the majority of rate setters are still concerned about strong pay growth and the impact it could have on future inflation. He noted that only a small number of MPC members are currently in favour of cutting rates further in the near term to provide additional support for economic activity.
Despite this caution, Stevenson suggested the Bank of England is likely to prepare markets for further easing later in the year. He pointed to the effect of government budget measures and the influence of a stronger pound, both of which are expected to help limit price pressures in the months ahead.
Meanwhile, attention is also focused on developments in Europe. The European Central Bank is widely expected to hold its own policy rate at 2%. Inflation across the eurozone is now close to the ECB’s target, and the strength of the euro — trading above $1.20 for the first time since 2021 — is helping to dampen imported inflation.
Oxford Economics has echoed the view that UK rates will remain unchanged this week. The consultancy believes the MPC is facing a delicate balancing act between stubborn wage growth and growing signs that the economy is losing momentum.
Edward Allenby, senior UK economist at Oxford Economics, said the committee is likely to remain cautious until there is greater certainty that inflationary pressures are easing. He explained that although most members expect interest rates will eventually need to fall again, there is unease over how future wage settlements could affect inflation in 2026.
Michael Saunders, senior economic adviser at Oxford Economics, also expects further cuts to take place later this year. However, he said the committee is unlikely to act at the upcoming meeting after having already reduced rates in December. In his view, a pause in February is the most probable outcome.
The broader economic backdrop remains challenging. Allenby described the UK as being in a period of mild stagflation, where growth is weak while inflation remains above target. This combination is creating divisions within the MPC over how quickly policy should be loosened.
Oxford Economics believes the end of April represents the most likely timing for the next rate cut. By then, policymakers should have a clearer picture of wage trends and whether spare capacity is building up in the labour market.
Economists at ING have argued that the Bank of England has taken a more cautious approach than recent data might justify. James Smith, ING’s UK economist, said the Bank’s strong reaction to rising food prices last year suggests that memories of the 2022 energy-driven inflation shock continue to influence decision-making.
Smith added that there are still strong reasons to consider further rate cuts, including weak recruitment surveys, slowing wage growth and forecasts that headline inflation could fall sharply by April.
Recent economic data paints a mixed picture of the UK economy. Business activity has shown signs of improvement since the autumn budget, but employment conditions have continued to weaken. Hiring has slowed, and unemployment remained at 5.1% in November, its highest level since early 2021.
Inflation increased to 3.4% in December from 3.2% the previous month. At the same time, private sector wage growth excluding bonuses slowed to 3.6% in the three months to November, compared with 3.9% in the previous period. This suggests some cooling in pay pressures, although not yet enough to reassure all policymakers.
BNP Paribas economist Dani Stoilova suggested the MPC vote could split seven to two in favour of holding rates steady. She highlighted higher energy and food prices, along with concerns about inflation expectations, as key factors behind this cautious stance.
Several senior figures are expected to support keeping rates unchanged, including chief economist Huw Pill and deputy governor Clare Lombardelli. External members Megan Greene and Catherine Mann are also likely to favour a pause. Governor Andrew Bailey may once again play a crucial role, having previously tipped the balance towards a cut in December.
Analysts at UBS believe Bailey is now more likely to vote for holding rates rather than pushing for another immediate reduction. They expect the committee to emphasise that while further cuts are possible, the current easing cycle may be approaching its final stages.
Pantheon Macroeconomics also expects the MPC to repeat its guidance that another cut is likely but that the pace of easing will remain slow and cautious.
Alongside its rate announcement, the Bank of England will publish updated economic forecasts covering inflation, growth and unemployment. These projections will provide fresh insight into how policymakers view the risks facing the UK economy over the next year.
Matt Swannell from the EY Item Club said a decision to hold rates at 3.75% is almost certain. He added that the Bank is likely to indicate that the period of rate cuts is nearing completion unless there is a significant deterioration in economic conditions.
The Bank of England will release its interest rate decision at midday on Thursday. Its next scheduled meeting will take place on 19 March, when markets will again assess whether conditions are right for the next step towards lower borrowing costs.
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