Decision and market reaction
The Bank of England left its benchmark interest rate unchanged at 3.75% after a closely contested 5-4 vote by the Monetary Policy Committee. The narrow split contrasted with a Reuters poll of economists that had predicted a more decisive 7-2 margin in favour of holding. Sterling dropped almost one U.S. cent and was on track for its largest single-day decline since September as markets moved to price in an earlier easing of policy. Two-year United Kingdom government bond yields fell by about seven basis points, touching a low of 3.620% before recovering some of the decline.
Why the BoE paused
The central bank paused primarily because its assessment of inflation has shifted; price pressures appear to be losing momentum more quickly than the Bank anticipated three months ago. Governor Andrew Bailey, one of the five members who supported holding rates, described his core message as one of "good news" given that inflation seems to be easing. He added that "All going well, there should be scope for some further reduction in Bank Rate this year."
Bailey did not specify a date for the next cut but said market expectations of two quarter-point reductions this year were "reasonable." He also characterized recent moves in bond yields as orderly when questioned by reporters about market volatility tied to political developments surrounding the prime minister and the appointment of a diplomat with known ties to Jeffrey Epstein.
Markets and the probability of a March cut
Investor pricing shifted materially after the vote. The probability attached to a March rate cut rose to close to 50% from around 25% before the announcement - a move Governor Bailey described as looking reasonable. Commenting on the appropriate timing for easing, Stefan Koopman, senior macro strategist at Rabobank, said cooling demand, fewer inflation risks and a softer labour market "all support the case for easing. If not March, then April remains the most plausible window for the next cut."
Policy split on the committee
The vote revealed clear divisions within the MPC about near-term inflation risks and the appropriate stance for monetary policy. Three members who supported staying on hold - chief economist Huw Pill, deputy governor Clare Lombardelli and external member Megan Greene - acknowledged easing inflation pressure but argued for "a more prolonged period of policy restriction." Governor Bailey and external member Catherine Mann viewed the evidence for further easing as growing but not yet conclusive.
The four members voting for a cut were deputy governors Dave Ramsden and Sarah Breeden, together with external members Swati Dhingra and Alan Taylor. Their concern was that falling inflation could dip too low as the economy weakens.
Economic outlook and forecasts
Alongside the policy decision, the Bank revised down its outlook for growth and raised its unemployment forecast. The BoE cut its growth projection for 2026 to 0.9% from a previous estimate of 1.2%, while forecasting a peak in unemployment of 5.3%, up from an earlier 5.1% estimate. Staff projections show inflation declining to around the 2% target in April, helped substantially by measures in Finance Minister Rachel Reeves' November budget, though the central bank emphasised it needs to be confident the fall is not transitory.
On the BoE's forecasts, inflation is projected to dip below target to 1.7% before settling around the 2% mark from the second quarter of 2027 through the end of the three-year forecast horizon. Private-sector regular wage growth is seen weakening only gradually, expected to ease to an annual rate of 3.3% by the end of 2026 from 3.4% in late 2025. The Bank indicated that roughly 3.25% pay growth is consistent with inflation running at its 2% target.
A Bank of England survey of businesses showed companies anticipate pay settlements averaging 3.4% this year, down from 4% in 2025.
BoE's guidance and international context
The MPC largely maintained the guidance it set out in December, stating explicitly: "On the basis of the current evidence, Bank Rate is likely to be reduced further." It added that "Judgements around further policy restriction will become a closer call. The extent and timing of further easing in monetary policy will depend on the evolution of the outlook for inflation."
For context on relative policy settings, the European Central Bank kept its main rate at 2% on the same day - almost half the level of the BoE's rate - a fact noted by market participants assessing cross-border yield differentials and currency moves.
BoE's recent easing and cautious stance
The BoE has already trimmed policy four times in 2025, including a quarter-point cut in December that was approved by the same narrow 5-4 margin. Despite these reductions, policymakers are displaying caution as they approach an interest-rate level that might be neither inflationary nor overly restrictive for an economy still contending with legacies from Brexit, the COVID pandemic and the 2022 energy-price shock.
Officials' commentary on markets and volatility
Deputy Governor Dave Ramsden compared recent yield movements to earlier episodes, saying the moves were much smaller than those prompted by U.S. tariff announcements. Governor Bailey, asked about the rise in yields seen on Wednesday and into Thursday, described the changes as orderly while being mindful of the broader political backdrop.
Outlook for households and the labour market
Although the BoE's central scenario points to a slowing economy, wage growth in the private sector is expected to soften only gradually. The combination of slower growth, a slightly higher unemployment peak and only modest deceleration in pay suggests households and consumer-facing firms will encounter a mixed environment. The Bank's projections and company pay expectations will be closely watched by markets and by businesses making pricing and hiring decisions.
Conclusion
The Bank of England's decision to hold rates by a narrow margin underlines the committee's divided view of the balance between supporting the economy and guarding against persistently high inflation. With inflation appearing to cool and the BoE updating its growth and unemployment forecasts downward, markets have adjusted to the prospect of nearer-term easing. Yet the committee's split and the central bank's caution make the timing and scale of future cuts dependent on how inflation, wages and the labour market evolve in the months ahead.