The Bank of England has decided to maintain its benchmark interest rate at 3.75%, while simultaneously revising down its economic growth projections significantly. The decision comes amid improving inflation prospects but concerns about weakening economic momentum.
The monetary policy committee’s vote revealed a narrower margin than many expected, with a 5-4 split showing substantial support for an immediate rate cut. Four committee members believed economic conditions already justified lower borrowing costs, while five preferred to wait. This division follows six previous rate cuts since the middle of last year and suggests that further easing remains on the table.
Governor Andrew Bailey emphasized the positive inflation developments that are shaping the Bank’s policy stance. He noted that inflation is expected to return to around 2% by spring, marking a significant achievement in the fight against price pressures. However, he stressed that maintaining this level of inflation requires careful policy management, justifying the decision to pause rate cuts despite the improving outlook.
A major concern highlighted in the latest monetary policy report is the substantial downgrade to growth forecasts. GDP is now projected to expand by only 0.9% this year, compared to the 1.2% growth rate anticipated just three months ago. This weaker outlook reflects multiple headwinds, including the impact of higher employer costs from increased national insurance contributions and the rising minimum wage, which have contributed to stagnant employment levels.
The impact of government policy on inflation is clearly evident in the Bank’s forecasts. Chancellor Rachel Reeves’s budget measures, including cuts to utility bills and frozen rail fares effective from April, are expected to drive inflation down significantly. The Bank now projects inflation will fall to 2.1% by the second quarter of 2026, a dramatic improvement from December’s 3.4% reading and close to the government’s 2% target, potentially ending years of cost-of-living pressures.