The Bank of England’s decision to maintain its base interest rate at 3.75% signals ongoing caution in the face of persistent inflation. The vote, which saw a narrow 5-4 split among the Monetary Policy Committee (MPC), reflects growing concerns over economic stability as the central bank balances efforts to curb inflation with the need to support growth. While inflation has shown signs of decreasing, the overall outlook for the UK economy remains fragile, with forecasts suggesting slower growth and rising unemployment.
This decision comes at a pivotal time, with inflationary pressures still posing significant challenges for policymakers. Despite cuts in the base rate in recent months, the Bank of England is navigating a delicate phase as it seeks to bring inflation closer to its 2% target.
A Delicate Balance: Inflation and Economic Growth
Inflation remains above the Bank of England’s desired target, prompting concerns over the long-term impact on economic stability. According to the Bank’s latest statement, inflation remains higher than expected despite recent measures, including government interventions in Chancellor Rachel Reeves’ November budget. These measures, such as utility bill reductions and a freeze on rail fares, are expected to help lower inflation, but the MPC has expressed the need to remain vigilant.
The UK economy faces a tougher road ahead. The Bank’s forecasts for GDP growth in 2026 have been downgraded, from 1.2% to 0.9%, a clear signal that economic momentum is slowing. Unemployment is also predicted to rise to 5.3%, a modest increase from the previous forecast of 5.1%, signalling potential challenges in the jobs market. With inflation still running above 3%, the committee’s cautious tone suggests it is not yet ready to relax its policy approach, even as some members of the MPC push for a rate reduction to stimulate growth.
The decision to hold rates at 3.75% also reflects the Bank’s complex position in managing inflation without undermining the economy. As inflation shows signs of stabilising, the MPC will likely consider further cuts in the coming months if inflation continues its downward trajectory, with rates potentially being reduced later this year. However, there is a fine line between encouraging growth and maintaining control over inflation, and the committee will need to closely monitor both factors.
Looking Ahead: The Path to Possible Rate Cuts
Despite the Bank of England’s decision to hold rates steady for now, the outlook suggests that lower rates could be on the table if inflation continues to ease. Governor Andrew Bailey, who supported the decision to hold rates, indicated that the central bank may reduce borrowing costs later in the year if the fall in inflation proves sustainable. According to Bailey, the Bank’s inflation forecast is expected to reach around 2% by the spring, with a potential further decrease to 1.7% later in 2026.
Yet, the path to rate cuts is not without risks. Some members of the MPC, such as Megan Greene, expressed concern that premature rate reductions could lead to a resurgence in inflation if the economy weakens too much. These differing opinions highlight the difficult task facing the Bank of England in determining when and by how much to adjust rates. While there is growing consensus that inflation may be under control, the risks of a policy misstep remain high.
