The Bank of England’s decision to maintain interest rates at 3.75% comes alongside forecasts showing inflation will drop dramatically to reach the 2% target by spring. While rates remained unchanged this month, officials have made clear that further reductions are likely as price pressures continue to ease.
The voting split within the monetary policy committee was notably tight, with five members supporting the hold decision and four backing an immediate cut. This division is significant because it suggests growing momentum toward lower rates. Since the middle of 2024, the committee has already reduced rates six times, and the latest vote indicates this easing cycle is likely to continue.
Governor Andrew Bailey struck an optimistic tone about the inflation outlook while explaining why rates were held steady. He stated that the expected fall in inflation to around 2% by spring represents positive progress, but emphasized that securing this achievement requires maintaining current policy settings. He also indicated that barring any unexpected developments, there should be room for additional rate cuts later this year.
The Bank’s economic projections show a significant deterioration in the growth outlook, with GDP now forecast to expand by only 0.9% this year. This is a marked downgrade from the 1.2% growth anticipated in November and reflects multiple challenges facing the economy. The labor market is also expected to soften, with the unemployment rate projected to climb to 5.3%, higher than earlier estimates of 5%.
Rachel Reeves’s budget initiatives are having a substantial impact on the inflation forecast. Her package of measures, including reductions in utility bills and a freeze on rail fares, both effective from April, are driving much of the expected decline in inflation. The Bank now projects inflation will fall to 2.1% by the second quarter of 2026, down sharply from December’s 3.4% and comfortably near the 2% target, offering hope that the cost-of-living crisis may finally be easing.