The Bank of England is expected to keep interest rates on hold this week after inflation rose for the first time in five months, though markets continue to signal that rate cuts may return later in the spring.
Analysts predict the Monetary Policy Committee (MPC) will vote to maintain the base rate at 3.75 per cent when it announces its decision on Thursday. The rate currently stands at a three-year low following four quarter-point cuts last year, which lowered borrowing costs from 5.25 per cent in July 2024.
The pause comes after inflation climbed to 3.4 per cent in December, moving further above the Bank’s 2 per cent target. While policymakers have indicated that interest rates are on a downward trajectory, the recent inflation data has strengthened the case for caution in the near term.
Markets are pricing in two potential rate cuts in 2026, with the first possibly arriving in March. Economists view the February meeting as a temporary pause rather than the end of the Bank’s easing cycle.
The nine-member MPC has been divided in recent meetings over whether inflation will fall quickly or remain stubbornly high. In December, the committee narrowly approved a cut by a 5–4 vote, with Governor Andrew Bailey casting the deciding vote.
UBS analysts expect Bailey to support a hold this week. “After swinging the vote in favour of a cut in December, it is likely Governor Bailey will vote for keeping rates on hold,” they said.
Economists at Morgan Stanley said labour market trends could influence the Bank’s next move. “We expect Bailey to focus on incoming jobs data, where we see a further rise in unemployment. This could lead to a March cut,” they added.
The EY Item Club also expects no change this week, describing a hold at 3.75 per cent as “near-certainty.” The forecaster suggested the MPC is likely to indicate that while another cut is possible, the rate-cutting cycle may be approaching its end.
The Bank will release updated economic forecasts alongside Thursday’s decision, detailing its expectations for growth, inflation, and unemployment. Bailey is also expected to address recent volatility in global markets, driven in part by uncertain trade policies and geopolitical tensions linked to Donald Trump.
In December, Bailey said inflation was expected to return to or near the 2 per cent target by April. Price growth is forecast to ease as household bills fall, following measures announced by Chancellor Rachel Reeves, including the removal of some green levies and a freeze on rail fares.
For now, economists believe the Bank will adopt a cautious approach, balancing early signs of cooling inflation against persistent price pressures and ongoing global economic uncertainty.