As expected, the Bank of England’s Monetary Policy Committee (MPC) voted this week to keep the Bank Rate unchanged at 3.75%. What was, perhaps, a surprise, given that the financial markets and most commentators were expecting this decision, was that the vote was only by the narrowest of margins at 5-4 majority with the Bank’s Governor (Andrew Bailey) still cast in the role of the “swing-voter”.
This was one of the MPC’s meetings at which the decisions are supported by a new set of forecasts, including those for inflation which is the key driver of the interest rate decisions. There is a significant change here with the MPC now suggesting that inflation in the UK will be back to their +2% target in April. This is an earlier date than previously predicted, largely because of the announcements in the Budget last November which will lower energy costs for a wide range of consumers, with smaller increases in administrative prices than in April 2025 also helping.
There are two explicit key policy judgements in the minutes of the MPC meeting:
- “The risk from greater inflation persistence has continued to become less pronounced, while some risks to inflation from weaker demand and a loosening labour market remain.”
- “On the basis of the current evidence, Bank Rate is likely to be reduced further; judgements around further policy easing will become a closer call.”
This has been widely interpreted as the Bank indicating that the next move on interest rates will be another cut that could come as early as their next meeting in the middle of March. This might seem somewhat counter-intuitive – why cut interest rates if inflation is on target? – but the Bank also downgraded its growth forecasts (to +0.9% for 2026 from +1.2% in the November report) and the MPC members who voted for a rate cut this time, did so because of concerns that inflation would undershoot the target because of weak growth.
Most of those voting to hold the Bank Rate at 3.75% remain concerned about the risk of inflation not falling sustainably to the target, largely because wage growth is still too high in their judgement. However, this was not true of the Governor whose comments in the minutes of the meeting suggest that he just wanted to wait a little longer, hence the conclusion that the next cut could come in one of the next two meetings (mid-March and end of April).
As well as the new forecasts, this meeting includes the regular report from the Bank’s Agents. Overall, output is lower than a year ago, with capital equipment producers among the groups noting a decline; the Agents report that the automotive sector has recovered as the temporary shutdowns unwind and aerospace remains resilient, despite defence contacts reporting that “new orders are slow to progress.”
There were also some important comments about investment. While the Agents contacts report that the cost of labour relative to capital has risen, creating an incentive to invest in labour-saving technologies, overall investment intentions remain subdued; this could pose a downside risk to the near-term outlook for business investment growth. There were also reports that the wider economic outlook is not conducive to investment, and while some firms are resuming delayed investment projects, these are mainly intended to increase efficiency and reduce costs.
In the US, the Federal Reserve held its funds rate at 3½ to 3¾ % when they met last week, and the European Central Bank (ECB) also left its rates unchanged yesterday. While there may be one or two cuts to rates in the US this year, it looks like they are close to the neutral rate; in contrast, further cuts are unlikely from the ECB as inflation is now below target.
For more details, you can get the Monetary Policy Summary and minutes of the MPC meeting from the Bank’s website at https://www.bankofengland.co.uk/monetary-policy-report/2026/february-2026. The report of the Bank’s Agents can be found at https://www.bankofengland.co.uk/agents-summary/2026/february-2026.