Bank of England keeps interest rates at 3.75% as inflation concerns persist

Bank indicates anti-inflation measures in Rachel Reeves’s budget likely to pave way for rate cuts in months ahead

Bank of England policymakers have left interest rates unchanged at 3.75%, but indicated that lower inflation as a result of cost-of-living measures in Rachel Reeves’s budget should pave the way for cuts in the months ahead.

The nine-member monetary policy committee (MPC) voted to leave borrowing costs on hold, despite forecasting weaker growth and lower inflation than at its last quarterly forecast in November.

But the narrower than expected 5-4 split in the MPC’s voting suggested further reductions in borrowing costs were to come. The committee has cut rates six times since mid-2024.

Andrew Bailey, the Bank’s governor, who voted to hold rates, said: “We now think that inflation will fall back to about 2% by the spring. That’s good news. We need to make sure inflation stays there, so we’ve held rates unchanged at 3.75% today. All going well, there should be scope for some further reduction in bank rate this year.”

In its latest monetary policy report, published alongside Thursday’s decision, the MPC projected gross domestic product would grow by 0.9% this year – down from the 1.2% it was expecting three months ago.

Reeves, the chancellor, announced a package of anti-inflation measures in her late November budget that she hoped would pave the way for more rate cuts. These included cuts to utility bills and a rail-fare freeze, both of which come into effect in April.

Largely as a result of these policies, the Bank now expects inflation to fall “much more than expected”, to 2.1% by the second quarter of 2026 – a whisker above the 2% target set by the government, and well below the 3.4% recorded in December.

Reeves has claimed this is the year the UK will “turn the page” on inflation, after the painful surge in prices that followed the reopening of the economy after Covid shutdowns and Russia’s full-scale invasion of Ukraine.

Yael Selfin, chief economist at KPMG, said: “The downward revision in inflation largely reflects the impact of the measures announced in the autumn budget, which will see energy prices ease from April onwards.”

While lower inflation should offer relief to cash-strapped households, the Bank is also expecting a weaker jobs market than previously predicted, with the unemployment rate rising to 5.3% this year compared with the 5% it was previously projecting for 2026.

The quarterly monetary policy report suggested Labour’s increase in employers’ national insurance contributions (NICs) and the rising minimum wage had contributed to flatlining employment over the past 12 months. Policymakers expect that to bear down on bumper wage rises, which some had feared would cause high inflation to become entrenched.

As inflation falls closer to the 2% target, the committee suggested, “judgments about further reductions will become a closer call”, repeating similar language used in December, when rates were last reduced. The next MPC meeting is on 19 March.

The four members backing another quarter-point rate cut immediately were the senior Bank insiders Dave Ramsden and Sarah Breeden, and the independent economists Alan Taylor and Swati Dhingra.

The MPC policymakers each set out their view in the meeting minutes, and Taylor suggested a base rate of 3% – implying three further cuts – should be “in our sights now”, pointing to what he called “continued drift” in Bank forecasts towards weaker growth and lower inflation.

By contrast, the more hawkish Megan Greene, another independent member, said she remained concerned about consumers’ high inflation expectations and strong wage growth, warning of the risk of “policy error” if the MPC cuts in the coming months as markets expect.

At the press conference after the decision, Bailey added his voice to the criticism of the disgraced former minister Peter Mandelson for leaking sensitive details of government policy to the child sexual abuse offender Jeffrey Epstein during the financial crisis of 2008-09.

Bailey said he was “shocked by what we are hearing”, adding, “we do learn from that that there are times when … lobbying happens which has ethics attached to it which I do find shocking, frankly”.

Asked for his personal response, Bailey appeared to become emotional, saying he and colleagues had worked closely with the late chancellor Alistair Darling on the response to the crisis.

“To see those pictures of Peter Mandelson with Alistair Darling. Alistair Darling was doing all the right things, and he was doing them with a thorough sense of honesty and decency, and he can’t speak for himself today, sadly,” he said, his voice trailing off.