Bank of England policymakers left interest rates unchanged at 3.75%, but Rachel Reeves suggested in the Budget that low inflation as a result of cost-of-living measures could pave the way for cuts in the coming months.
The nine-member Monetary Policy Committee (MPC) voted in November to keep borrowing costs on hold, despite forecasting weaker growth and lower inflation than its last quarterly forecast.
But a narrower-than-expected 5-4 split in the MPC’s vote suggested further reductions in borrowing costs. The committee has cut rates six times since mid-2024.
Bank governor Andrew Bailey, who voted to keep rates on hold, said: “We now expect inflation to fall to around 2% by the spring. That’s good news. We need to ensure inflation stays there, so we left rates unchanged today at 3.75%. All being well, the Bank rate is likely to fall further this year.”
In the latest monetary policy report published alongside Thursday’s decision, the MPC forecast gross domestic product to grow 0.9% this year – down from the 1.2% expected three months ago.
Reeves, Chancellor, announced A package of anti-inflationary measures She is expected to pave the way for more rate cuts in the late November budget. These include cuts to utility bills and a freeze on rail fares, both of which will come into effect in April.
Largely as a result of these policies, the Bank now expects inflation to fall to 2.1% by the second quarter of 2026 – above and below the government’s 2% target 3.4 percent was recorded in December.
Reeves claimed this was the year the UK would “turn the page” on inflation, following the reopening of the economy after the Covid shutdowns and the painful rise in prices following Russia’s full-scale invasion of Ukraine.
Yael Selfin, chief economist at KPMG, said: “The decline in inflation largely reflects the impact of measures announced in the Autumn Budget, which will see fuel prices cut from April.”
While low inflation should provide relief to cash-strapped households, the bank also predicts a weaker-than-expected jobs market, with the unemployment rate rising to 5.3% this year, compared with an earlier forecast of 5% for 2026.
The quarterly monetary policy report pointed to Labour’s rise in employers’ National Insurance Contributions (NICs) and a rising minimum wage helped employment correct over the past 12 months. Policymakers are expected to endure bumper wage increases, which some fear will cause high inflation to settle.
With inflation falling closer to the 2% target, the committee suggested, “judgments about further cuts will be closer,” repeating the same language used in December, when rates were last cut. The next MPC meeting is on March 19.
The four members who immediately backed another quarter-point rate cut were senior bank insiders Dave Ramsden and Sarah Breeden and independent economists Alan Taylor and Swati Dhingra.
MPC policymakers each gave their views in the meeting minutes, and Taylor indicated a 3% base rate – hinting at three more cuts – should be “in our sights now”, given what he called a “continued drift” in the bank’s forecasts towards weaker growth and lower inflation.
By contrast, the more hawkish Megan Green, another independent member, warned that she remained concerned about consumers’ high inflation expectations and strong wage growth, risking a “policy error” if the MPC cuts in the coming months as markets expect.
In a press conference after the decision, Bailey added his voice to criticism of disgraced former minister Peter Mandelson for leaking sensitive details of government policy to child sex offender Jeffrey Epstein during the 2008-09 financial crisis.
“He’s surprised by what we’re hearing,” Bailey said, adding, “We’re learning from it that there are cases of lobbying that I can clearly say has ethics attached to it.”
Asked for his personal response, Bailey appeared emotional, saying he and colleagues had worked with the late chancellor Alastair 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 perfect sense of honesty and decency, and today he can’t speak for himself, sadly,” he said, his voice trailing off.
