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The Bank of England is expected to keep interest rates unchanged at 3.75% on Thursday but signal that cuts are likely in the coming months as policymakers weigh conflicting signals from the UK economy.
Members of the central bank’s monetary policy committee are widely expected to vote to hold the base rate at 3.75%, a three-year low, as inflation rose for the first time in five months to 3.4% in December.
After four rate cuts in 2025, market pricing implies only a 4.1% chance of a reduction at this week’s meeting and a 28% probability of a cut on 19 March. Investors expect the first and so far only cut of the year to come in April.
Tom Stevenson, investment director at Fidelity International, said: “The Bank of England is widely forecast to hold rates at 3.75%, with a majority of rate setters focused on elevated wage growth and just a couple of dissenters pushing for a further cut in the cost of borrowing to support the economy.”
“Despite this, the Bank will probably signal further cuts later in the year as policies introduced in the budget weigh on prices and the impact of a stronger pound feeds into the economy.”
“The ECB meanwhile is widely expected to hold its policy rate steady at 2%. In Europe, inflation is bang on the central bank’s 2% target and a strong euro above $1.20 for the first time since 2021 is likely to keep prices in check.”
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Oxford Economics also expects the MPC to keep interest rates unchanged as officials balance sticky pay growth against signs of slowing activity.
“We expect the Bank of England’s Monetary Policy Committee (MPC) to hold Bank Rate at 3.75% at [this] week’s meeting,” said Edward Allenby, senior UK economist at Oxford Economics.
“The majority of MPC members anticipate further rate cuts will be required, but they’re concerned about the potential strength of 2026 pay awards and their impact on inflation.”
“The MPC are likely to cut interest rates again during this year,” added Michael Saunders, senior economic adviser at Oxford Economics. “But, having cut in December, the committee probably will not cut at the upcoming February meeting.”
Allenby said the UK macroeconomic backdrop remained difficult. “The current bout of mild stagflation is likely to keep the committee divided on the timing of these future cuts, encouraging a gradual approach to loosening policy further,” he added.
Oxford Economics believes April is the most likely timing for the subsequent reduction. “We see the end April meeting as the most likely timing for the next cut,” Allenby said. “By then, the MPC should have a clearer view of the pay awards and whether this is further evidence of slack emerging in the economy.”
Analysts at ING said rate setters had been “significantly more cautious” than the data warranted.
“The Bank’s hawkish reaction to higher food inflation last year suggests the scars of the 2022 energy driven inflation spike, which lasted longer than everyone expected, still run deep,” ING’s UK economist James Smith said in a note.
“There are still compelling reasons to cut rates further not least weak hiring surveys and tumbling wage growth, and the fact that headline inflation is likely to halve by April.”
Recent data have painted a mixed picture. Business activity has improved since the autumn budget but hiring has continued to deteriorate. Unemployment held at 5.1% in November, its highest level since early 2021.
Inflation rose to 3.4% in the year to December from 3.2% a month earlier, while private sector wage growth excluding bonuses slowed to 3.6% in the three months to November from 3.9% in the previous period.
BNP Paribas economist Dani Stoilova said the vote could split 7-2 in favour of holding rates at 3.75% because of higher energy and food prices and concerns over inflation expectations.
Chief economist Huw Pill, deputy governor Clare Lombardelli and external members Megan Greene and Catherine Mann are among those expected to back a hold. Governor Andrew Bailey could again prove decisive after swinging the vote toward a cut in December.
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Analysts at UBS said: “We think that after swinging the vote in favour of a cut in December, it is likely governor Bailey will vote for keeping rates on hold.”
“We expect the MPC to reiterate its previous guidance that another Bank Rate cut is likely but the rate cycle is probably close to an end,” said Rob Wood at Pantheon Macroeconomics.
The MPC will also publish updated economic forecasts on Thursday, detailing its outlook for growth, inflation and unemployment.
Matt Swannell at the EY Item Club said a hold at 3.75% was a “near certainty” and that the committee was likely to indicate that the cutting cycle was nearing its end.
The Bank of England will announce its decision on interest rates at noon on Thursday. The following meeting will take place on the 19 March.
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