The Bank of England is widely expected to maintain the current base interest rate at 3.75% in its first Monetary Policy Committee (MPC) decision of the year, following a recent uptick in inflation. The announcement, due Thursday, comes amid cautious optimism about economic momentum and growing concerns about persistent price pressures.
Recent official data has shown that Consumer Prices Index (CPI) inflation edged up in December, interrupting a five-month decline. The rebound has added weight to predictions that the MPC will pause any further reductions in borrowing costs for the time being.
Modest Growth and Sticky Prices Challenge Further Easing
According to Investec economist Philip Shaw, the main argument for maintaining rates lies in the inflation figures for December, which stood at 3.4%, up from 3.2% the month prior. This places inflation notably above the Bank’s 2% target, even if it falls slightly below the November forecast of 3.5%.
The rise was driven in part by increased tobacco duties and airfare costs, as confirmed by official statistics. While not a dramatic surge, the change appears to have been enough to make back-to-back rate cuts unlikely. “The principal reason to hold off from easing again is that at 3.4% in December, inflation remains well above the 2% target,” Shaw noted.
Further complicating the picture, wage growth continues to trouble policymakers. According to several economists, including Matt Swannell of the EY ITEM Club, there are lingering concerns among MPC members about sticky wage inflation, which may help sustain broader price pressures in the coming months. “Although the data over the last few weeks has tilted in a slightly dovish direction, this does not appear to be anywhere near enough to prompt a majority of the MPC to favour back-to-back cuts,” Swannell said.
Policymakers Weigh Growth against Inflation
The MPC’s last meeting, held just before Christmas, resulted in a rate cut, with Governor Andrew Bailey expressing confidence that the UK had passed the recent peak in inflation. According to Bailey, falling inflation allowed the committee to lower rates for the fourth time in 2025. But he also warned that future decisions would be “a closer call,” suggesting a more cautious approach moving forward.
Since then, there have been small but noteworthy improvements in economic indicators. According to national data, gross domestic product (GDP) grew by 0.3% in November, offering a measure of reassurance about underlying economic resilience. Nonetheless, many analysts argue that this is not enough to tip the balance in favour of another cut.
Edward Allenby, senior economic advisor at Oxford Economics, indicated that while further rate reductions are possible in 2025, the timing would likely hinge on upcoming data, particularly around pay settlements. “The MPC will continue to face a delicate balancing act between supporting growth and preventing inflation from becoming entrenched,” he said.
The Bank of England’s decision will be closely watched by markets, businesses and households alike. With inflation still above target and the economic recovery showing only modest strength, the MPC appears set to proceed cautiously. The 3.75% rate is expected to hold, as policymakers navigate the complex terrain between price stability and economic recovery.
