Bank of England Holds Rates at 3.75% as Policymakers Signal Cuts Ahead
The Bank of England kept its benchmark interest rate unchanged at 3.75% on Thursday, delivering a closely watched decision that revealed growing internal divisions as policymakers debate when to move next.
Key Takeaways
- The Bank of England held rates at 3.75% in a narrow 5-4 vote, highlighting internal debate.
- Inflation is expected to return to the 2% target by spring, opening the door to future easing.
- Officials signaled potential rate cuts later this year, but stressed decisions will remain data-driven.
The vote split 5-4 in favor of holding rates, underscoring how close the bank may be to a policy shift later this year.
The decision came as little surprise to markets. UK inflation climbed to 3.4% in December, complicating any near-term argument for rate cuts and leaving officials cautious despite a sharp cooling from the double-digit inflation seen three years ago.
Rate pause masks growing pressure to ease
Policymakers emphasized that rates have already been reduced six times since August 2024, marking a clear turn away from the aggressive tightening cycle that defined the post-pandemic period. Officials said inflation has fallen substantially and is now expected to return to the Bank’s 2% target by spring, reinforcing the view that the worst of the price surge is over.
Still, the Bank struck a careful tone. It stressed that monetary policy must balance two competing risks – inflation proving more persistent than expected versus a slowdown in the labor market and household spending pulling inflation below target.
Signals point to possible cuts later this year
While no immediate move was made, the Bank offered its clearest hint yet that borrowing costs could fall again in the coming months. If economic conditions and inflation trends continue to develop as projected, officials said there should be room for additional rate cuts in 2026. However, they stopped short of committing to a timetable, repeating that each decision will depend on incoming data.
This cautious guidance suggests UK borrowers may see some relief later this year, even as policymakers remain wary of easing too quickly.
Markets react cautiously
UK equities showed little enthusiasm following the announcement. The FTSE 100 slipped 4.80 points, or 0.047%, reflecting lingering uncertainty around growth, inflation, and the pace of future rate cuts.
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